Big thanks to reader Shaun Noll, Founder and Managing Partner of Stirling Capital Management, for a heads up on an energy stock that he believes is absurdly cheap by any valuation measures. Shaun had emailed me privately about this company about a month ago – and since then it’s up over 50%!
Of course, I didn’t pull the trigger at that time (doh). But Shaun still believes the company, Cano Petroleum (CFW), is ridiculously underpriced based on their reserves – here’s an excerpt from his analysis on CFW for Seeking Alpha when asked for his absolute favorite stock pick:
The stock is Cano Petroleum (CFW), an onshore oil & gas company with assets in the Southwest U.S., based on the simple idea that one can buy oil, in the ground in Texas, for less than $3 a barrel.
Using conservative metrics, my analysis shows recovery to equity holders in Chapter 7 liquidation of over $1.00 a share, while a company auction would likely produce $2.00-plus per share of value within one year, compared to $0.66 per share price today (Ed. note: CFW closed at $0.82 today). The primary risk involves management destroying value in a misguided attempt to continue managing the company.
Cano is an E&P company operating in Texas, New Mexico and Oklahoma, focusing on long-life assets and application of enhanced oil recovery techniques. The board and CFW management recently terminated a merger agreement with Resaca Exploitation that was crafted during the height of the credit crisis and low oil prices. This has caused the equity to shed nearly 50% of its value as merger arbitrage players exited the trade in a stock with relatively low liquidity.
Although based on any financial or screening metric Cano looks terrible, upon closer examination of underlying tangible asset value, we believe the current equity price offers an unusually compelling risk vs. reward scenario with clear catalysts.
I am not yet long CFW, but I will probably pick up a small starter position for myself later this week. It will be one of the very few stocks I own right now.
Cano Petroleum is ridiculous undervalued under $1 says Shaun Noll of Stirling Capital Management. (Chart source: StockCharts.com)
Looking for an energy short play to pair with CFW? How about Clean Energy ETF PBW – a bad investment for all markets!