Opinions
Larry Berman CFA, CMT, CTA
Legacy Oil and Gas Inc.
LEG-T
WATCH
Mar 10, 2014
Stock price when the opinion was issued
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He recently covered his Short on this, because he was expecting this bounce. However, the stock has not bounced a lot. They recently cut their dividend. He would stay away from this. He will re-short if there is any bounce heading into January. Fundamentals are deteriorating. Other companies that you might consider are Mart Resources (MMT-T) and ??? (See Top Picks.)
Balance sheet was a little too high at $60 oil, and now we are in $48 oil for the time being, so leverage is becoming more and more of an issue. Thankfully they don’t have dividend stress on their balance sheet, but at the current oil price, their debt to cash flow is an excess of 6 times. They will be in a stressed environment and may have to explore non-core asset sales.
He did a lot of trimming of oil in Oct/Nov, including this one. It has a levered balance sheet, but has really good assets. Probably a trading vehicle now. If you think oil is going to $65-$70 by the end of the year, the stock will be up, but if oil goes to $40 and stays there, they would be in financial difficulty. If you Buy, don’t stay in it for very long.
Legacy (LEG-T) or Surge (SGY-T)? Hands down, he would own Surge. This one is in trouble right now. Balance sheet debt is very high; possibly 7 or 8 times cash flow. Their CFO just left. They are looking at any and all options to right side the balance sheet and just get through this trough period.
Great assets. Unfortunately a little bit of mismanagement has caused the debt to be too high for investors’ appetites. There has been a lot of shareholder value destroyed by the company. Thinks the company is worth in the $4 range, but to get there it has to do some real strategic reshuffling of the deck. Management has been talking about doing something for 6 months now, but nothing has happened. Prefers others.
The kind of stock you would buy if you were really bullish on oil right. Has good production and strong management. The current debt/cash flow ratio is huge at something like 5 or 7 times. This is why the stock has been pummelled so badly. If oil prices do another downturn or stay down for a period of time, companies like this are at a financial risk. He thinks oil will check back into the $50 range.
The big picture story for the next 5 years or so, supply is going to dwarf demand in oil and gas in North America. However, when you look at a stock like this that has been beaten up because of some of those reasons of weaker production prices in Canada, and you look at a five-year picture, what you are seeing in this and a lot of these focused here in Canada, you’ve got these big bases coming. In order to get relief there and have some of these start to break out, you need that supply/demand thing to start to turn around. Pipelines east and west, pipelines north and south, LNG distribution should bring better prices to Canada but it is still a few years off. The stocks are starting to respond so this is important to watch.