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Every Junior Has A Story. This Is The Strangest Ever.

One of the strangest junior energy stories listed in Canada may become one of the best in late 2019.
Newport Explorations (NWX-TSXv) holds a 2.5% gross overriding royalty on several oil and gas permits in Australia, that are operated by Beach Energy and Santos Ltd.; both are major Aussie oil and gas producers.

What that means is that Newport receives 2.5% of the revenue from any production on those blocks without having to pay for the cost of developing the assets.  Newport shareholders get all this royalty money for doing NOTHING.

This company does NOTHING except cash cheques.  It’s a great business, and has been for years.  Royalties have been flowing since 2013 (I’m going to outline it all for you below); it’s an incredible cash cow.  I have been a small shareholder for years, just to stay close to this amazing story.

CEO Ian Rozier and CFO Barb Dunfield have done a great job shepherding value for shareholders in what has been a very turbulent time for other junior energy stocks.

With no costs and only revenue, the company even spits out the occasional dividend.  The last dividend was 5 cents per share, or $5,153,194 in the quarter ending October 31 2018. There is no powerpoint on the site to check historical dividends.

But it may become a regular dividend soon, which could give the stock a big boost.

I’m writing this story now because I see that RBC Dominion – Canada’s largest brokerage house – issued a bullish report on Beach Energy on August 19.  And I saw in the last MD&A that Mr. Rozier’s pay package just went up to $42,000 per month, and Ms. Dunfield’s just went to $29,000 per month.

This great team has kept the cash flow going for shareholders – the most recent quarterly shows that net income was $3.9 million for the last nine months, up from $2.7 million a year ago.  Royalty revenue was $6.8 million for the nine months, up from $4.9 million a year ago.

While management deserves all the credit they’re due, the light oil assets have done really well.  And the gas exposure is great as Aussie natgas prices – which were just $4/gigajoule in 2015, before spiking to nearly $20 a couple years ago.  They are now roughly $10.

It’s one of the most profitable natgas markets in the world.  Domestic Aussie prices are so high because all their natgas is now exported to Asia – at lower prices than domestic ones now ($7.50 in Japan vs $10 in Australia)!  Electricity prices in Australia – especially along the east coast – have more than doubled in the last four years.  Production from the wet gas assets is also increasing.

Yes, Newport could continue to be an amazing cash cow as production from these lands – and Aussie gas prices – each go higher.

This is a GREAT story folks – it may be a great investment today, but one day it will be a great movie I’m sure.  Sit back and enjoy the read.

In a very prescient move, way back in 1997, CEO Ian Rozier clearly wanted to transform Newport (then known as CVL) from a mineral exploration to oil and gas.  He acquired interests in oil and gas permits covering over 75,000 km in Queensland, New South Wales and Northern Territory, Australia, as well as an oil exploration lease in New Zealand.

Those aspirations effectively ended in 2002.  On September 4, 2002, Newport issued a press release disclosing it was selling its remaining oil and gas interests in exchange for a petroleum royalty of 2.5% on those properties.

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Source: Company website

Here’s what I believe Newport has:

  • PEL 91 – 2.5%
  • PEL 106 – 2.5%
  • PEL 107 – 2.5%
  • PEL 632 – 2.5%

Newport’s decision to exit the oil and gas business was made because management was acquiring a 50% interest in the Mantua Copper Project.

The 2.5% royalty interest did not get much attention in Newport’s public disclosures subsequent to 2002 as the focus of the company was elsewhere.

Then there was this press release in 2005:

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You can see that by 2005 the Mantua copper project was already forgotten about and Newport had moved onto a Western Australian Nickel Project (subsequently dropped).

It wasn’t until February 2014 that another update was provided on the Australian Oil and Gas interests.

 

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Suddenly this forgotten 2.5% royalty interest on nothing had become a share of 13,000 barrels per day of oil production.

Newport’s share price which was trading at $0.08 per share then had a lift-off.  At $0.08 per share Newport had a market capitalization of only $2 million.  Meanwhile, the company by early 2014 had already been earning almost $1 million per month from the 2.5% royalty interest.

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February 2014 was the first press release.  But when I looked into the previous company financial statements the royalty revenue per quarter looked like this:

  • Quarter end Jan 31, 2013 – $186,000
  • Quarter end Apr 30, 2013 – $570,071
  • Quarter end Jul 31, 2013 – $2,719,242

So this production royalty stream was ramping up through 2013 and the first press release relating to it came out in February 2014.

There WAS disclosure however – I picked those quarterly revenue numbers out of the middle of the MD&A – the Management Discussion and Analysis.  I repeat, the revenue was disclosed in the financial statements of Newport.  They were there for anyone to read.

By mid-2013 Newport was earning 50% of its market cap in just one quarter! And it was all right there in the MD&A.

Well, at least CEO Ian Rozier read it, and he obviously liked what he read. In August of 2013 – months before the first press release – he purchased over 300,000 shares between $0.04 and $0.045 per share.

And being as the vastly increased royalty revenue was in the public domain – via the MD&A which all shareholders read – on December 19, 2013 Newport granted to its executives 6 million options to buy shares at a price of $0.05.

Then after the press release, on March 10, 2014 Newport announced a private placement of 20 million shares at $0.11 per share as well as a full warrant to buy shares at $0.14 expiring now, in 2019.

Management bought a big block of that financing.

Tracking CEO Rozier’s ownership interest in the company around that time looks like this:

  • August 2013 – owns 3 million shares
  • August 2013 – purchases 300,000 shares at 4 cents
  • December 2013 – Receives 1.8 million options at $0.05
  • March 2014 – Acquires 2 million shares at $0.11 and 2 million options at $.14

Here is how CFO Barbara Dunfield’s ownership interest developed:

  • August 2013 – owns 348,000 shares
  • December 2013 – Receives 1.6 million options at 5 cents
  • March 2014 – Acquires 2 million shares in the private placement at $0.11 and 2 million warrants at $0.14.

(Records show that Ms. Dunfield just disposed of 1 million shares on August 13, or 16.8% of her holdings, on August 13 2019).

At the time back in 2013, these shares were issued for less than the value of the cash that the company had on its balance sheet.

All this action by management brought a class action lawsuit – surprisingly – from people who sold shares at low prices and feel they should have been made more aware of the level of Australian royalty income:

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The class action lawsuit was dismissed by the courts.

I think it was rather ungrateful of these shareholders – I mean, since that time in 2014, dividends have been sporadic but steady.  The company has $8.1 million in cash as of June 2019.

And I was very happy to see that management is watching out for shareholders – see this paragraph from the March 3 2019 press release:

“The company is aware of rumours of a possible bid for the GOR and/or a possible hostile takeover attempt of the company as a way of acquiring the GOR. No offer for the GOR would be considered until the company has had an independent valuation done on the GOR assets and any such offer would be subject to a fairness opinion as well as shareholder approval.

In the event of any hostile takeover attempt, the company is confident that the majority of shareholders would support the board in order to safeguard the company’s treasury, its future cash flows, shareholder dividends and assets.”

This team has a lot on their plate running Newport, but even if they take their eye off the ball for a second, they have a big share position, and could not realistically be ousted.  Fortunately for us shareholders, in fact, I would say it’s impossible.  Good thing for us they bought all that stock back in 2013 after the MD&A disclosed that greatly increased royalty revenue. Phew!

It’s a great story – and with Beach Energy increasing production and high Aussie gas prices, a regular dividend could develop.

Disclosure: I am long 10,000 shares of Newport Energy.



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