Monday, October 24, 2016

Sold my EOG Resources moving into Chinook Energy

When oil prices were near their bottom last year I decided, based on previous oil cycles, to buy the best shale operator out there as I felt that prices would eventually recover. 

I bought EOG Resources and as oil prices recovered the price of EOG also recovered. I sold the shares the other day for around a 25% gain including dividends. The reason I sold is that I have found a couple of smaller companies that I think will give me a higher gearing to increasing energy prices. 

I believe energy prices will heading higher and although EOG will do well it is not going to double from here. The three companies I am adding to the portfolio are smaller and riskier but I think they will increase more as energy prices go up. 

The first company I bought is Chinook Energy (CNKEF). I am becoming increasingly convinced that the Montney shale in Canada will be the next hot shale play. I got the idea for Chinook from a writer I follow on Seeking Alpha who goes by the nom de plume "Value Digger". I give credit where credit is due. His article describing why Chinook is undervalued and has 200% upside from its current price can be found here.

The second stock I am adding is Jericho Oil (JROOF). Jericho is a small oil and gas operator with properties in Oklahoma. The company follows a classic value investor methodology. They have been buying distressed producing oil properties during the recent down cycle in oil. The company purposefully is staying away from hot areas like the Permian because the costs for acquiring properties is far higher than the areas in Oklahoma where they are operating. 

Basically Jericho has cashflow neutrality at around $20 per barrel. As oil prices go higher they will look to develop there proved but undeveloped resources. They basically will grow slowly at current oil prices but if prices get above $60 per barrel they have significant upside optionality. That is a business model I like and is similar to Altius Mineral's strategy of doing deals in resource market down cycles. Jericho's most recent investor presentation is here.   

The third company is on my watchlist as it is temporarily overbought. The company is Blackbird Energy . They are a small company with a nice land package in the Montney shale. They have quite a bit of development going on around them and several deals have happened in their neighborhood. They have some infrastructure that is close to being brought online which will lead to some initial production coming online later this year. This is more speculative and obviously has more upside. Nevertheless it is only being watched as the price has run recently due to interest in the Montney Shale. 

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