Gear Energy: Growth Ahead

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Don Gray, long-time chairman of Peyto and Gear Energy, announced a new Chairman for Gear Energy.The new management team will study assets and delay the capital budget to repay debt.There is also a new...

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Don Gray is the long-time chairman of Peyto (OTCPK:PEYUF). A previous article has more detail on this. Recently, Don Gray announced a new Chairman of the Board. Scott Robinson, who was a vice president at Peyto before becoming Chairman of the Board, continues a very long interaction of Peyto personnel with Gear Energy personnel. This follows the hiring of a new CEO. The main idea here is to revitalize the company into a growth future. New CEO And Strategy Obviously, the new staff need to study the assets and come up with a strategy. To facilitate this study, the capital budget will be delayed, and the resulting free cash flow will repay debt (hopefully to zero or at least \"close enough\"). Gear Energy New Senior Executive Additions (Gear Energy August 2024, Corporate Presentation) The stock price clearly has yet to reflect the new goals. However, management is likely to have an ongoing business with decent cash flow to build upon. The result is that this could turn out to be a \"sleeper\" idea. This was originally a company that strictly produced only heavy oil. But then came all the challenges of the 2015-2020 period. To accommodate the changing market conditions, management made some light oil acquisitions. This enabled the company to avoid the worst effects of the cyclical downturn. But since then, the company has largely stagnated. The new Chairman of the Board and new senior officers is likely an attempt to restart the company growth plans of this company. As noted in the corporate announcements, Don Gray purchased 1 million shares as a show of support for the new management. More conservative investors may want to see tangible results before accepting that this new alignment will work. Nevertheless, Don Gray has an enviable record in the oil and gas industry. Therefore, I like the chances of the new management. Balance Sheet The balance sheet was already in good shape to begin with. The latest plans to repay the outstanding debt only make this issue a much safer idea. (Note that this is a Canadian company that reports using Canadian dollars unless otherwise noted.) Gear Energy Financial Summary (Gear Energy August 2024, Corporate Presentation) There will be a jump in free cash flow for the fiscal year due to a capital expenditure delay. That could push some expected new production into the next fiscal year. On the other hand, an upstream company with no debt is an ideal way to handle the low visibility and very volatile upstream business. Financial risk is virtually \"out the window\" when there is no debt. During a downturn, this allows management to decide to just collect checks (while waiting for a recovery) or to shut-in production until a cyclical recovery brings about higher selling prices. Since there is no debt to service, management can review the advisability of really any production. More importantly, rarely do companies with stock prices this low have an ongoing business with cash flow and no debt. Sometimes, an investment idea in this range is actually safer than much larger companies due to conservative management. That appears to be the case here. Using the stock price shown above, the market value of the company is in the C$180 million range. But that is less than 3 times the C$70 funds flow from operations shown above. Small companies can stay mis-valued for a long time because the market is not as efficient (in pricing) when it comes to a company of this size. However, the growth strategy shown above should mean that at some point the company will become large enough to attract attention. For patient investors, the wait for that day could be worth it. Future Strategy Management is going to first do some research before delineating a future strategy. That honestly makes sense. In any event, the cash flow generated will go to pay down debt until management has a plan. Gear Energy Revised Capital Budget (Gear Energy August 2024, Corporate Presentation) As noted in the presentation, there were some heavy oil wells drilled. Those wells are now beginning production. That is likely to be the contribution to the current year's production. Some fixed costs like administration will climb because there is lower than expected production to spread the costs over. However, this should fix itself once management details a plan and begins to execute that plan. There are some wells that may be drilled towards the end of the fiscal year. But investors should not be surprised if any of the current plans change once management decides upon a path forward. Stock Price Clearly, the market value of the stock, at less than 3 times GAAP cash flow, is a cheap idea. The plan to repay the debt should offer downside protection. Gear Energy Stock Price History And Key Valuation Measures (Seeking Alpha Website September 24, 2024)Gear Energy Stock Price History And Key Valuation Measures (Seeking Alpha Website September 24, 2024) Any upstream producer (especially when heavy oil is involved) should be considered as a variable distribution entity. However, this distribution is backed by a low debt balance sheet that is about to become debt free. Therefore, if market conditions or a strategy change demand a dividend cut, the very low debt should mean that the dividend would be quickly restored because strained balance sheet finances are not the issue. Despite the high yield, the company can easily afford that dividend until this management decides how to allocate cash flow based upon a future strategy. Now whether the dividend continues, or management decides to reinvest that money in the business, is another matter. There is considerable future uncertainty here until management presents a plan for fiscal year 2025 and then reviews the long-term strategy. Summary Despite the low stock price, this company represents a legitimate business that has long been headed by one of the more known people in Canada's oil and gas industry. That makes this company very different from a lot of garbage that trades in this pricing range. Despite the lack of forward guidance, the new management should tell shareholders that this will become a growth story in the future. The details will be forthcoming in the future. However, the currently low debt ratio and the promise to repay all bank debt make this a fairly safe proposition. That is especially true considering the low market value (which will soon be the enterprise value) to GAAP cash flow. With a name like Don Gray backing the company, the lack of a future strategy is acceptable for the time being. This is a strong buy with the idea that the balance sheet will continue to be conservatively managed, and that management will come up with a reasonable way forward. There is a small but legitimate ongoing business that produces cash flow. Now let us see what management can do with the existing business. Risks Any upstream company is subject to the low visibility and volatility of commodity prices. Any severe and sustained downturn can materially change the outlook. The plans for a debt free balance sheet likely mean that this company will \"breeze\" through any cyclical downturn because there will be no debt to service. However, in this industry, nothing is certain. The loss of the services of senior management can be more damaging to smaller companies where every employee is likely to be significant, than it is to larger companies where there is often a replacement already training for the job. It is assumed that the new management will work out. But if that is not the case, then senior management turnover could delay the growth plans that led to this management change in the first place.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2474726569"}