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A Tale of Two Oil Companies: Stormcat Energy and Fox Petroleum

by: Michael Goode August 29, 2007    
Michael Goode

Michael Goode

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Sometimes the stock market is completely irrational. I will illustrate this with two wildcat oil companies (or junior exploration companies as similar companies often prefer to be called). Both companies are highly risky and may never make a profit. They are both highly speculative. Given the risks, however, one seems cheap while the other seems priced for perfection in this world and in the next.

The first company, StormCat Energy (SCU); $0.81 +5.19%, market cap: $65.6M, seems cheap to me. It is trading at an all-time low, just about at its net tangible asset value (about $60 million). It is producing some oil, although still not very much, and remains unprofitable.

While I am no oil and gas expert, I know that paying no more than the net value of all the company’s property and equipment (not even considering the value of the oil and gas underground) will lead to success more times than not. As long as the company’s management has some clue what they are doing, the company should eventually become profitable. There is a decent chance of management having a clue–the company’s executive roster reveals a decent amount of experience.

click to enlarge
SCU 1-year stock chart

Fox Petroleum (FXPE.ob) is a different story. The company has no employees and no assets other than a few mineral leases on property on Alaska’s North Slope and in the North Sea. The company has a market cap of $116 million and its leases are worth at best $50 million (and that is being very generous). If the company cannot raise enough money to explore or does not find oil, its leases are worth $0.

Other than its leases, the company has assets of $2 million. The company’s management does not inspire confidence, either. Only one of the executives has oil operating experience, while one was involved on the financial side of mining companies and the third has no previous similar experience. Perhaps the only good thing I can say about Fox Petroleum is that management is not being paid absurd salaries.

Fox Petroleum’s contract with its President and CEO does not inspire confidence either; the requirement is that he must work a minimum of three days per week (see the 8k where this is reported). For $140k per year, that seems like a very minimal requirement. See the company’s most recent 10Q and 10K for details.

click to enlarge
FXPE 1-year stock chart
While I am no expert on valuing oil exploration companies, I cannot think of any logic behind the divergent valuations of these two companies. Disclosure: I have no pecuniary interest in either SCU or FXPE.ob. My disclosure policy never capitalizes its exploration costs.

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This article has 7 comments:

  •  
    Sep 05 09:25 PM
    thanks mike goode about fxpe.ob
    Reply
  •  
    Sep 05 09:26 PM
    thanks mike goode about fxpe.ob
    Reply
  •  
    Dec 04 09:28 PM
    Not being in the oil industry, I can see why poster stated what he did regarding fxpe- but he is not entirely truthful. At this point there are 3 separate wells focussed to be drilled: in North Sea, In Alask and in the Texas gas JV deal they are tied with. They do have employees, and in a conversation I had with fxpe corporate lastw eek, they are having problem finding the right skilled people to work on the projects as is much of the story today with all oil companies, because the level of skilled tradesmen is not what it used to be; as we have a generation of people who wanted nothing to do with hard work or getting their hand dirty and went into technology fields and now a demand is on for high dollar jobs related to the oil industry overall globally but not enough pool of qualified applicants for the jobs.

    But fxpe has all its bases covered and the correct strategies and people behind them, and by end of december product will be realized for all the naysayers out there and then people will see, that their next focus is to become listed on Nasdaq regulated stock exchange; and those with enough forethought and patience, who have been buying the stock, will all be handsomely rewarded in time as this company takes off as the new Exxon of its era.

    its biggets factor is all of its locations are in neutral regions to affected by political instability like the middle east or Nigeria, etc. They have seizmics in place, land in place, equipment being secured and already moving forward with their plans as stated and nothing fishy about this firm at all- It is just today too many have become too greedy for fast profits and have no idea what goes into a full oil company operation whether it is exploitation of a well, recompletions performed, or hosts of other factors that all take money, time and hard work to implement, and VERY stringent safety requirements for workers.
    Reply
  •  
    Dec 05 09:06 AM
    The point still stands: one company is recovering economically significant amounts of oil from producing wells. The other hopes to drill some wells (and does not have enough cash on hand to do much drilling). My thesis has been accepted by the stock market: FXPE's stock has fallen by 54% while SCU's has fallen by only 26%.
    Reply
  •  
    Mar 12 03:51 PM
    #1 rule of investing - Never go against the momentum of the market. A better book value is nice to have just incase disaster happens, but if the price is dropping it's best to get out while you can. Having to use book value to cash out of a stock isn't any fun & it's very time consuming with your investing money.

    Your thesis has only been accepted by unsophisicated investors who apparently didn't realize it takes time for an exploration & drilling company to make money. You've neglected to talk about the assets in TX & KS which may be where your theory went awry. Nevertheless, You should've at least seen their latest headline that talks about a third party giving the company a strong target price of $5.50. Then there's the problem of using the longer, older term when analizing price, but this is the oil business, as more reserves are found and wells made to produce, the business becomes more stable & the price goes up. Check the shorter term stats on this type of business.
    Reply
  •  
    Mar 16 12:37 PM
    The independent report is from a company paid by FXPE to cover it. I don't know about you, but if I were paid by a company to cover it, I would realize who buttered my bread and give them a positive view. This is the same reason that Moody's, Fitch, and S&P have been too positive in their ratings of CDOs and other similar structured bonds.

    The relationship between FXPE and the company covering it is stated plainly in the report: www.investrend.com/Adm...
    Reply
  •  
    Apr 30 11:13 PM
    Well, it looks like I was right. After accounting for FXPE (now FXPT)'s 5 for 1 reverse split, its current price is $0.61. SCU on the other hand is at $0.97. That makes for a 73% decline in FXPT's stock price and a 26% gain in SCU's stock price. Not bad, eh.
    Reply
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