I have only followed one oil & gas stock in 2018 (Ikkuma) and we were fortunate in August to have it targeted in a Merger/Takeover. Below is the email sent to MicroCap subscribers August 24th.
I haven’t commented on IKM since mid May because I have been waiting for an asset sale to close. This took some patience (and antacids) but congratulations to those that bought and held this. If the takeover announced this morning closes, it will result in a 2018 gain near 180%.
Back in November I discussed Ikkuma following a $20M pipeline asset sale, followed by a $34 million acquisition
The acquisition was high production-cost natural gas in the foothills of the Alberta mountains – giving them a massive land position. This was done while crude oil was near USD 52 per barrel. WTI is now $71.
This also made them a very large natural gas producer but gas prices failed to recover through the winter (as hoped) and their financials (debt in particular) have weighed on the share price.
But while poor natural gas prices have been a painful burden for them, that acquisition came with two big benefits:
1) an enormous infrastructure package that had estimated replacement costs near $600 million (keep in mind that was from a $34 million acquisition). This included 1,800 km of pipelines and many processing facilities (8 major and 13 minor).
2) a land package (400,000 acres) with huge natural gas reserves and dozens of drilling locations for light oil.
With oil recovering significantly since the 2017 acquisition, the mid and large tier oil producers are both cash-flowing AND seeing their share prices hit 52 week highs. There is significant optimism coming back into the oil sector and companies are looking to make deals again.
Ikkuma’s infrastructure (pipeline and processing) assets are very valuable and this morning they announced they have entered into a deal to dispose of $30 million worth – with more planned. This still needs to close (likely July) but this will significantly clean up their balance sheet and give them working capital to drill those light oil targets.
If that oil drilling is successful, this is a material “turn-around” story in the making.
Given the news this morning (and assuming it closes as planned), the 30 to 35 cent range appears to be attractive risk and provides solid exposure to these high oil prices.