Here is something that you wouldn’t expect.

Permian Basin oil producers are selling oil for $20 per barrel less than Brent pricing price…yet the largest producer in the Permian couldn’t be happier about it.

How is that possible?

As soaring Permian production overwhelms takeaway capacity and decimates Permian oil prices Occidental Petroleum (OXY-NYSE)—with 300,000 barrels per day plus of Permian production—is set to score a billion dollar plus cash windfall.

Occidental’s Unique Permian Footprint

New day, same story.

We have seen this movie again and again and again in the North American oil business.

Too much production and too few pipelines creates big problems.

Up here in Canada it is an ongoing issue.  The country has lost billions of dollars due to lack of pipeline capacity.  It happened in the Bakken too in the early years of this decade.

Now it has reappeared in the Permian (it already happened here before) in a major way with Midland – WTI differentials recently blowing out to as wide as $15 per barrel from West Texas Intermediate pricing.

And remember that is on top of the $10 per barrel discount that WTI trades at to Brent pricing.  Permian producers are getting $20 per less from each barrel of production than their global competition.

Quite frankly I’m sick and tired of watching this industry fritter away so much money……which is why the Occidental Petroleum story is so refreshing.

OXY is a huge operator in the Permian, in fact the single largest producer in the region.

In total the company has 1.4 million net acres that are spread across the entire Permian region—the Delaware and Midland Basins plus the Central Basin Platform and New Mexico Northwest shelf.

OXY has 650,000 net acres across the booming Delaware and Midland Basins that are now main focus of the industry.  I wouldn’t mind having a few of those given that acreage prices in the best spots are as high as $60,000 per acre!

That land has tremendous value—but that’s not all the competitors are admiring about OXY these days.  It isn’t the 300,000 plus barrels per day of production either.  If it’s not the land or production…what could it be you ask?

What has everyone green with envy is…the fact that while OXY has 300,000 plus barrels per day of Permian production the company has 470,000 barrels per day of committed pipeline capacity to the Gulf Coast.

That is considerable more takeaway capacity than OXY needs.  With everyone else desperate to get their oil to market OXY management has the ability to sell that excess capacity for a considerable profit, given current marketing conditions.

In addition to excess pipeline capacity OXY also has the Port of Corpus Christie Ingleside Energy Terminal.

Ingleside has approximately 2.1 million barrels of total oil storage capacity and opens up global oil pricing for OXY through export capacity of 300,000 barrels per day (with plans to expand to 750,000 barrels per day).

Finally a North American producer that isn’t landlocked!

How Big Is This Cash Windfall Going To Be?

Occidental’s midstream assets don’t just act as a hedge against Midland differentials blowing out.  The company is actually profiting from these wide differentials.

That is pretty incredible considering OXY is producing over 300,000 barrels per day in the Permian.  The company makes more money specifically because of the widening of differentials.

And I’m not talking about small dollar amounts here.

OXY just came out with updated 2018 guidance.  The company increased the anticipated operating income from its Midstream/Marketing division to a range of $900 million to $1.1 billion.   That revised guidance was specifically due to wider WTI-Midland discounts relative to Magellan East Houston pricing.

The new guidance is up from an initial range of only $200 – $300 million……so that is a cool $800 million increase for 2018.

As I said —– big dollars — $$$$.

But I think that even with this large increase that they have sandbagged their guidance.

That new $900 million to $1.1 billion Midstream operating income range is based on differentials of $6.00 to $6.75 per barrel.  That seems awfully conservative given that the differential was recently as high as $15 per barrel and based on what the market is forecasting.

The futures market currently expects the differential to be in the double digits through at least August of 2019.  The view is based on what appears almost certain to be a significant shortfall of Permian pipeline capacity until late in 2019.

For the rest of 2018 the average differential is pretty close to $15 per barrel.  OXY has told the market that each $1 per barrel increase in the differential creates an additional $120 million of cash flow for the company.

Therefore if the differentials do turn out to be closer to the $15 the market is forecasting instead of the $6.00 – $6.75 in OXY’s guidance….. the company could be looking at another $1.5 billion of operating income over the next 12 months.

In 2018 alone OXY will likely be up another $800 million on top of the $800 million increase in 2018 guidance OXY already came out with.

Combined that would mean that these wide differentials are going provide OXY with a $1.6 billion cash windfall in 2018 and more to come next year……at least another $1 billion in 2019 based on the current future strip.

Occidental Petroleum is company with a $60 plus billion market cap.  Is a cash windfall of a couple billion dollars significant?

The answer would be yes!  In 2016 entire cash flow from operations was only $2.5 billion.  In 2015 cash flow from operations was only $3.2 billion.

Yes those were low oil price years, an alternative views are that this extra cash covers OXY’s entire dividend for this year or more than half of the company’s capital spending.

Any way you slice it this is a material lump of cash for Occidental Petroleum.

Great to see huge diffs work in favour of a producer…even if it’s a behemoth like Occidental.

Keith Schaefer

Editors Note: OGIB subscribers have had a great couple months, with stocks like Viper Energy (VNOM-NASD) GeoPark (GPRK-NYSE) and Athabasca Oil (ATH-TSX).

But my colleague Paul Andreola, editor over at sister-publication SmallCap Discoveries has had a phenomenal run in the last two years, with several 10-baggers including Lite Access (LTE-TSXv; 25 cents – $3.75 over 18 months) and Hamilton Thorne (HTL-TSXv; 10 cents – $1.10 in a year).  His most recent win was a double in Viemed (VMD-TSX)—in just three months!

Paul has a new stock pick—and I haven’t seen him this excited for a long time.  He convinced me to buy into his enthusiasm, and his pitch was simple:

1. New management has come into this stock
2. They quickly found customers willing to pay TEN TIMES what they were previously charging for their service
3. Hence, revenue for this micro-cap company is about to SOAR.

Paul does exhaustive research.  He meets with management, and studies the macro. 

Paul made me more money in 2017 than anyone.  He was #1 for that year.  And now we are on our way again with his new stock pick.

Please have a quick read of his more detailed pitch here—and then I strongly urge you to sign up for his newsletter before word gets out on his new favourite stock.

By Brandon Mackie, co-editor

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Keith Schaefer

Cobalt is at near record prices—and The Big Catalyst for cobalt stocks hasn’t even happened yet.

That leaves a lot of upside left for investors in this space.   The Good News is…I expect this to happen soon.

Public company stocks in the other energy metal—lithium—had a great run in 2017, and investors made millions.  I think there was three reasons for that:

1. The lithium price moved up and stayed up (and is still up!)
2. EV sales set a record pace all through the year, and all over the world
3. The industry supply chain started buying into lithium producers—especially the high-quality juniors.

Number 3) really told the investment community that the promoters and management teams that the physical market was truly tight…and the fears of an even tighter market were real.

That had a huge impact on junior lithium stocks.  And when—not if—that starts to happen in cobalt stocks, I expect the sector to give investors some fantastic wins.

In fact, it could be even better than lithium because there are so few cobalt stocks.  When the institutional money flow starts, it will be a lot more concentrated than it was in lithium.

I see First Cobalt (FCC-TSXv) as one of the first juniors to attract big institutional money flow.  The recent merger with US Cobalt gives the combined company a high-grade, low-capex deposit right in the United States (Idaho), and a fully permitted mill and refinery in Ontario.

What’s important for both the buy-side institutions and the supply chain is having a primary cobalt supplier. They are as rare as hen’s teeth; almost every deposit in the world is tightly tied up with copper or nickel.

The value in FCC’s Iron Creek deposit in Idaho is over 90% cobalt, so physical supply is not at the whim of another metal’s economics.  EV manufacturers will want absolute security of supply to buy into a project or company.

“The American auto makers are waking up to the fact that there is no cobalt,” says Trent Mell, CEO of First Cobalt.  “So they’re now starting to talk.”

Mell says he’s surprised it has taken the car companies this long to come around, but this process is happening now.

“We are seeing the car manufacturers who are going into this space to fill their electric vehicles that need cobalt. Tesla’s S3 car needs 10 kilograms of cobalt per car.  You start multiplying that up, it’s crazy.”

Energy metals analyst Chris Berry says that the demand for cobalt in lithium ion batteries should increase by 2.5X  from today’s levels based on global automaker EV aspirations.  So the auto industry has a lot of incentive to secure supply.

The first deal with a car company will be a huge catalyst for all cobalt stocks, not just the first one to sign a deal.   The auto manufacturers have huge incentive to tie up supply, for two reasons:

1. Demand continues to hit new record each quarter-see this chart on EV sales in the US, which is usually the laggard in sales compared to Europe and Asia:

1. Supply from the DRC—Democratic Republic of the Congo—remains challenged due to uncertainty around taxation laws and the ongoing child labour situation.

Given these conditions, it’s no wonder that the cobalt price is moving up to new 10-year highs:

Right now, the world is completely dependent on multi-national giant Glencore to increase their production in the DRC to meet rapidly growing demand.

But with the merger with US Cobalt complete, CEO Trent Mell says everything is now in place to speed up the first American cobalt production:

“We’ve got a great deposit in Idaho. We have a permanent facility, we have the money—over $26 million—we’ve got the right shareholders, and we’ve got the investment market. All I care about is how fast can we move.”

Having a permitted mill and cobalt refinery is key for First Cobalt and its investors (not to mention the $100 million replacement cost they got for literally pennies on the dollar).

It’s the only one in North America. With permits still in place Mell says the refinery can be quickly restarted—but even more important, expanded to produce more product and high-margin cash flow.

“We’re working on a restart and expansion. And the expansion, you can take it as big as you want frankly. It’s a permanent facility and the flow sheet works, and we want to get it from the current 24 tons per day to 40, which would be more than enough to process material out of Iron Creek to… 1000 to 1500 tons of cobalt sulfate a year.”

“That would be 1% of global supply out of that facility—just for starters.  We could do more than that because the footprint of our property can be expanded three-fold under our permits.”

Permits are more valuable than high grade ore in getting a new mine into production.  There is no shortage of oil, lithium or cobalt—but getting permission to extract, produce & sell it to whomever you want…that’s tough; at least in the western world.

And that’s what the world wants–western cobalt production; from governments right through to industry.  That puts a premium on First Cobalt’s assets.

With $26 million cash, First Cobalt is quickly moving forward on two fronts.  One is planning the restart and expansion of the producing assets—the mill and refinery.

The second is getting Iron Creek ready for production.  It will be a quick build with low capital costs—only possible because of continuous, high-grade cobalt compacted inside a larger envelope of lower grade material.

Mell’s back-of-the-napkin math suggests a quick three-year payback on the mine at lower prices than today.  A primary cobalt mine today could have gross margins of 60%-70%.

In short, the path to production is simple, with both the asset (ore) and the production facility in place.  With automakers now knocking at the door looking to secure supply, construction capital will be the least of First Cobalt’s worries.

Cobalt stocks have been simmering for weeks now, but that catalyst that could get them boiling again is rapidly approaching.  Being well-positioned in the few primary cobalt stocks in the world would be a smart move for investors.

 Management has sponsored and reviewed this article.

The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons.  Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom.  Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements.  No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity.  He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

The stocks of oil producers working in the Permian Basin of West Texas took a huge hit on Friday as the Street, as two reports—one by Goldman Sachs and the other by boutique brokerage Bernstein—said Permian price discounts would get deeper faster and stay deep for longer.

Goldman was talking about oil, and Bernstein was talking about natural gas.  It’s a double-whammy for Permian producers, especially for those in the Delaware sub-basin, which is on the western Permian.

So while the international oil producers are getting $20/b more now than in Q4 2017, my research shows Permian producers are actually getting less per barrel of oil equivalent (which includes natgas and natural gas liquids)!

Over time, Permian wells get gassy, so natural gas is a HUGE part of their realized pricing—and therefore their profitability.

Let’s talk oil price discounts first. Permian crude being priced at the Midland hub is now taking almost a $12 per barrel discount from crude priced in Houston (essentially WTI).  You can follow that differential through this link.  The futures curve shows the differential widening in the coming months.

With WTI also trading at a $12 differential it means that Permian producers are getting a price that is $25 per barrel less than the global Brent price.

Goldman expects these wide Midland differentials to be a medium-term problem–about 18-20 months.  They suggest it’s possible that some unhedged producers could shut in production for a short time in 2019 until the new pipeline capacity is online.  If they don’t, they will be forced to use trucks, which have a transportation cost of $12-$13/barrel.  And they threw out a crazy statistic–there are now 35,000 trucks used by the industry in the Permian, and continued production growth would require another 4,000.  That’s a HUGE number!

Significant takeaway relief isn’t coming until Q4 19 through a combination of the Cactus 2, Gray Oak and EPIC pipelines.

It isn’t just a big discount on oil sales that Permian producers are facing in the months ahead.  Now let’s talk about natural gas price discounts because of  pipeline constraints.

The widening of natural gas differentials is a big deal in the Permian because production here gets gassier as wells age.  That is another dent to cash flows which once again pushes up balance sheet leverage.

The Waha Hub for natural gas pricing is located in the western Permian. On Friday June 1 the influential boutique research firm

Bernstein issued a report showing the Waha-Nymex Henry Hub price differential blowing out to as much as $1.60/mcf by mid-2019.   That means if Henry Hub is $2.50/mcf next May, Permian producers would get 90 cents under Bernstein’s hypothesis.

Bernstein estimates that at least six new major natural gas pipelines are going to need to be built by 2025. Why that many?

Bernstein used theirs and Rystad’s research to come up with Year End 2017 natgas production in the Permian at 6.491 bcf/d—but by YE 21, they expect that to grow to 12.4 bcf/d—a 91% increase in just four years.

This may not fundamentally impact a lot of Permian producers this year, as most in the basin have hedged a lot of production for 2018 and 2019 (and a lot of those hedge books are WAY underwater at $70 WTI, but that’s for another story).

But from a stock perspective, deeper discounts or “diffs”—for differentials, as the industry calls them—is bad news for all Permian stocks.

Remember the pricing discounts in the Bakken starting in 2012?  They hit over $20/b for over a year, and while crude-by-rail helped, it wasn’t until the Dakota Access Pipeline in 2017 that Bakken traded at the same price (or sometimes higher) than Texas-based WTI pricing.  That was 5 years of discounts.

Because the new oil pipelines required in the Permian are all within the state of Texas, Goldman noted that they don’t see any challenges in getting them built–unlike in Canada, or Applachia.  They expect the Permian oil discount to end in 2020, and “diffs” to go to zero.

But for now, a lot of investment has already moved out of the Permian into select Bakken stocks like Whiting (WLL-NYSE) and Continental (CLR-NYSE), which have been stellar performers in the last three months.

By the way, the Market and the industry has known what take-away capacity there has been for oil and natgas for years…but they have not been able to plan well enough in advance.

Who Is Most Exposed?

With no pipeline relief coming until late 2019 investors should be clear on which Permian producers are most exposed.  As I said, many companies have hedged away much of the differential risk or have firm transport commitments that provide endpoint pricing.

Some haven’t.

Those best positioned would include WPX Energy (WPX-NYSE), Pioneer Resources (PXD-NYSE) and Parsley Energy (PE-NYSE) which have almost all production protected through the end of 2019.

The Permian focused producers most exposed are Diamondback (FANG-NASDAQ), Matador (MTDR-NYSE) and Cimarex (XEC-NYSE) all of which are going to be taking Midland pricing for the majority of their Permian production.

Oil discounts for 18-20 months.  Natgas discounts for potentially longer.  Lower pricing and profitability.  All of it is starting to cool the red-hot Permian for energy investors.

EDITORS NOTE–There is an under-the-radar oil producer–outside the Permian–that is among the most profitable in the United States right now.  Its stellar growth is now funded, and the management team has made billions for investors in their previous companies.  Get ready to hear all about this money making machine in a week’s time.

Keith Schaefer

Did you know that 90 percent of every good we buy gets loaded on a ship at some point?  And shipping accounts for about 4-5% of global fuel use.

Those two stats basically guarantee that there WILL be a major disruption to the oil and shipping markets in 2020–just two years from now.  How exactly everything unfolds isn’t entirely clear.

What is clear is that it will raise costs on many, many things.  Get ready for every good that you purchase becoming more expensive.  Buying a washing machine, a toy for your children/grandchildren, a plane ticket, some sugar and yes especially your gasoline.

You are now on notice, in 2020 the price of virtually everything is going to take a jump higher.

This is also going to be a major event for both the oil and gas and shipping industries.  Some companies are going to make a lot more money because of this…..some are going to experience the opposite.

I don’t even need to stop there.  Entire countries are going to feel the impact.

Here Is What Is Happening

In 2020 (that is just 18 months from now……terrifying I know!) there are new rules coming into play for the global shipping market.  That may not sound interesting but trust me it is.

Those new rules are intended to reduce the amount of pollution produced by the world’s ships.

These rules were created by the International Maritime Organization (IMO). Starting in 2020 the IMO is going to enforce a complete ban on ships that use fuel that contains a sulfur content higher than 0.5%.

The current standard is 3.5%.

A ship in violation will be hit with fines, almost certainly find that their insurance become invalid, and likely declared “unseaworthy” which would result in the ship being barred from sailing.

This isn’t a slap on the wrist or a parking ticket that can be ignored.  The shipping industry needs to abide by this and the start date is getting very near.  The analyst reports that I have read suggest that compliance will be very high.

If you were wondering why the IMO is cracking down on sulfur emissions I was able to find a few pieces of information…..and they are startling.

One report (1) indicates that just 15 of the world’s largest ships emit as much pollution as the entire global automobile fleet (almost 1 billion cars).  That sounds crazy until you realize that the low grade bunker fuel (or fuel oil) used in ships has 2,000 times the sulfur content of diesel fuel used in cars.

The ships aren’t the problem; it is the high sulfur fuel that they burn.

Combine that information with a few other eye opening facts:

• These large container ships have 109,000 horsepower engines which weigh 2,300 tons — they burn a lot of fuel!
• That each ship typically 24hrs a day for about 280 days a year — they almost never stop!
• There are more than 90,000 ocean-going cargo ships — there are a lot of them!
• 70% of all ship emissions are within 400km of land — they operate in sensitive locations

Another report, this one published in the Environmental Science and Technology concluded that the emissions from the 90,000 plus cargo ships in operation globally cause 60,000 deaths per year from lung and heart problems and create $330 billion in health care costs.

Apparently sulfur emissions are very bad.

Both The Shipping And Energy Industries Are Ill-Prepared

The enemy targeted by the regulations is the high sulfur fuel oil.  Today the global shipping fleet consumes 4 million barrels of it per day.

At least 3 million barrels per day of that demand disappears when the clock strikes midnight on December 31, 2019.

All of that demand gone overnight, literally.

Almost all of that demand for high sulfur fuel oil is going to switch to marine gasoil, which is a lower sulfur distillate fuel.

Think for a moment about the logistical implications of 3 million barrels of demand for one product disappearing and a similar 3 million barrel per day increase for another one appearing.

Pricing of the two different fuels is obviously going to be dramatically impacted.

Today marine gasoil currently trades at a premium of $250 a ton to fuel oil but the futures curve is now showing this premium ballooning to $380 per ton by 2020.

That big increase in fuel cost is going to be bad for the shipping companies.  Thomson Reuters Research estimates that the fuel cost for a VLCC (a big-boy oil tanker that carries 2 million barrels) will jump by 25%.  That is a big deal given that fuel already represents half of a ship’s daily operating cost.

In turn, the increase in cost to the shipping industry is going to get passed on down to you and me.

For some this will be good news–like, whomever is already equipped to make and sell that marine gasoil.  They will get some big-time margin expansion.

That would be refiners that are equipped with complex facilities that can exploit price differentials between heavy and light crudes.

Globally the publicly traded operators that are best prepared are believed (according to Morgan Stanley research) to Valero (VLO-NYSE), Repsol (REPYY-OTC) and India’s Reliance Industries.

The bigger question is that how does the refinery industry physically get prepared to meet an additional 3 million barrels of demand for marine gasoil in just 18 months?  Can it?

The cost to adjust a refinery so that it produces more distillates with less sulfur content is estimated to be almost $1 billion.  The smaller refineries can’t afford that and will be stuck producing fuel oil that there is no demand for.

Global Oil Price Differentials Are Going To Be Reset

The easiest way for a refinery to produce fuel that has less sulfur is to process crude oil with a lower sulfur content.

That will mean demand for lower sulfur oil will increase while demand for high sulfur oil will drop.

The result of that will be changes to how the different oil grades are priced globally.

“Sour” crudes with higher sulfur are going to see their pricing suffer — we are talking steep discounts.  Those high sulfur (sour) crudes would include what produced by Venezuela, Mexico and Ecuador.  Not exactly what any of those countries need right now.

It would also be yet another kick in the teeth for Canadian heavy oil producers who have already suffered discounts from pipeline constraints for years.  The Canadian Energy Research Institute (CERI) said last year they thought that 500,000 bopd of Canadian crude could be affected, as a large chunk of it has 2-5% sulphur.

Meanwhile pricing for the light, sweet blends like North Sea crude, Nigerian Bonny Light and North American shale oil will increase.  So keep the grade of oil being produced when you are looking at oil producers as investments.

When this hits in 2020 it could be a seismic shift in the global oil markets.

How it all plays out is very complicated but it will clearly impact anyone who wants to move virtually anything, and I’m not just talking about goods moving by ship.  The strain of limited refining capacity for lower sulfur fuels is going to increase the prices of all oil products, including diesel, jet fuel and petrol.

Because these “clean” fuel products are closely related, when demand and pricing for one surges that tends to also raise prices of the others.

I’ve got my head down looking for the best investment opportunities that are going to come out of this.  I’m sure I’m going to find a couple of beauties.

Editors Note: the new shipping regulations should increase demand–and pricing–for light oil. Get my favourite light oil stock right now–a company already increasing dividends, and growing production quickly. Click HERE to get the name and symbol.

A hostile bid in the Canadian oilpatch is…un-Canadian, eh?

But the industry has one now with private-co Velvet Energy bidding 75 cents per share for Iron Bridge Resources (IBR-TSX; OEXFF-PINK; formerly RMP Energy) in an all-cash deal.

It also puts two former colleagues on the opposite sides of the fence: IBR’s CEO Rob Colcleugh and Velvet CFO Chris Theal were both founding partners of boutique brokerage firm Tristone Capital, a highly respected outfit bought out by global giant Macquarie many years ago.

The Prize here is IBR’s big land package–almost 50,000 net acres—in the Gold Creek section of western Canada’s Montney play, along the B.C.-Alberta border.  Gold Creek is in the liquids-rich zone, making economics some of the best in the country.

The Montney is the ONLY hot play in Canada; if you’re producing oil or condensate.  Just like down south in the US, time and technology have transformed economics.  I’m talking about the same longer laterals and more intense fracking that we all read about in the Permian.

IBR just announced a well with an IP30 of 1800 boepd, including 575 bopd of liquids—a highly economic well, and well above the Street’s type curve of just under 1200 boepd.

“Liquids” are things like butane, ethane, propane and in Canada, much of it is condensate.  Condensate is very valuable in Canada, as it is used to dilute the thick, gooey oilsands production so it will flow better in a pipeline.  Most of IBR’s liquids is this very valuable condensate (think of condensate as a super-light oil) which trades at a similar price to oil.

Iron Bridge is a very small company; a minnow surrounded by whales.  To the SW is another private-co Hammerhead Resources (the big block of scarlet red in the map below), backed by Private Equity giant Riverstone, and to the east is Velvet Energy (the pinkish-grey block in the map below), backed by US giant PE company Warburg Pincus.

IBR’s strategy has always been to get bought out, and I have little doubt it will happen with a sweeter offer.

The Street agrees, bidding the shares up to this initial 75 cent takeover price before the end of the first day of trading.

But the end buyer may or may not be Velvet, as large Montney land packages are rare.

The two companies have held informal talks as early as last summer, but IBR felt the bid then was too low (with nobody saying what that bid was…).

Between very low Canadian natgas prices and some bizarre pipeline politics, junior Canadian energy stocks fell deeply out of favour with investors since that time.

IBR did a great deal last fall, selling one of its non-core assets for $80 million, and giving it a balance sheet with $20 million net cash.  The stock doubled from 40-80 cents on that news, but then fell back over the winter.

After drilling some wells, they now have $2 million net debt, but CEO Rob Colcleugh says they are now producing at 4000 boepd, and have an annualized cash flow rate of roughly $21 million after their latest well results.

At 75 cents and 155 million shares, Velvet says they are valuing Iron Bridge at roughly $120 million.  They say that’s a 58% premium to when they put the bid to IBR’s board on May 13, and a 45% premium to Friday May 18 close.

Velvet contends their bid is 12x consensus cash flow for 2018, but IBR says that was before the latest wells were added…and they have capacity for 5200 boepd.  At $21 million annualized, the valuation is more like 5.9x cash flow.

Velvet also talked about high costs per boe (barrel of oil equivalent; this is a way of bringing the oil and gas into one valuation metric), but of course now those numbers get cut in half as well with the new production.

And of course smaller companies will always have larger G&A components per boe—by definition.

What are Canadian junior gas producers being valued at now?  A look at more than 50 gas-weighted transactions going back to 2015—the bottom of the market where economics were much worse than today—shows an average of $57,667 per flowing barrel on assets that averaged 47% gas—very similar to Iron Bridge’s production mix today.  The average cash flow multiple was 6.7x.

At 4000 boepd, IBR is being valued at $30,000 per flowing barrel and 5.9x cash flow.

But that leaves out one very important—in fact, THE most important reason for this hostile takeover—the 50,000 acres (49,600 to be exact).

At $1500/acre, that’s $74.4 million or 48 cents a share cash in addition to the 75 cents.  The most recent transaction in the area was well over a year ago (when economics were worse…) and it was $1600/acre—and that was for raw land with no proven production on it.

Lastly, there are midstream assets there (batteries, which are holding tanks for oil) worth over $20 million as well, and roughly $9 million worth of stock in another producer called Tangle.

One other wrinkle…that doesn’t really mean much is that the new management team have 75 cent warrants good for another three years…so every penny over 75 cents they get paid two pennies. However, with the cash that brings in, it’s not dilutive to a bid to any meaningful degree.

CONCLUSION—both the math and the Street say another, higher bid is coming, and my guess it’s much closer to $1.  Investors have been lukewarm at best towards gas-weighted Canadian juniors, and the industry is now taking advantage of it.  The only thing we know for sure; at the end of the day, being Canadian, they’ll all be sorry ;-).