U.S. crude oil has fallen nearly 29 per cent since the end of June, and was fetching $42.33 (U.S.) a barrel on Monday as oversupply persisted.
The oil patch is slogging through a rough patch, and for activist investors in search of hidden value, that spells opportunity, according to one.
Livermore Partners of Northbrook, Ill., has a small stake in Zargon Oil & Gas Ltd., which last week announced it had hired a financial adviser to help it search for strategic alternatives such as a sale amid delays in ramping up its main project.
"We're seeing so many opportunities, you wish you had enormous amounts of capital," said David Neuhauser, managing director at Livermore.
Mr. Neuhauser's firm is not interested in energy's big names, such as Chevron Corp., Exxon Mobil Corp. or ConocoPhillips Co., whose shares have been weakened by the collapse in oil prices. It's the even-harder-hit smaller players in North America and abroad that it finds attractive.
"We're looking for deep value in companies that many people don't take stakes in because they are under the radar, or they are risky so that people say, 'Why do I want to get involved?'" he said.
U.S. crude oil has fallen nearly 29 per cent since the end of June, and was fetching $42.33 (U.S.) a barrel on Monday as oversupply persisted. This has pressured energy companies as dwindling cash flow squeezed spending and forced many to seek concessions from lenders as they fell afoul of debt covenants. The S&P/TSX energy group has lost a fifth of its value since the start of this year.
Any oil price rebound will have a greater impact on smaller producers than large ones, Mr. Neuhauser said.
"Exxon's only going to go up so much, even in a recovery to $80 a barrel. But if oil goes to $80, one with deep value, like even Zargon, could double or triple in equity value," he said. The trick is finding the players that are not about to go out of business in an extended downturn.
Livermore has a 3-per-cent stake in Zargon, which hung out a for-sale on Thursday. The largest investor is Franklin Templeton Investments Corp. with 17.5 per cent of the stock as of July 31, according to Bloomberg.
Zargon is among a crop of Canadian dividend-paying junior oil companies that flourished when oil prices were in the $100-a-barrel range. Many have chopped their payouts to cope with the fall in prices.
The thinking is that Zargon's technically tricky Little Bow enhanced recovery development, in which chemicals are pumped into the reservoir to boost production, may be of interest to a player with deeper pockets. Zargon's other Western Canadian assets are known for having low rates of production decline, which could attract another dividend-paying firm.
In June, Livermore called on the company to abandon the "divco" structure to preserve cash so it could fund its Little Bow project, and to sell other assets.
Mr. Neuhauser said investors should not expect a quick resolution to the alternatives search, especially with the industry in sharp decline. The important thing is to get it under way to position any moves for an eventual oil price recovery.
"Our view is we have ample time with Zargon because the value in the asset base isn't inherent in the equity price today," he said. "Our thought process is, we still want to get ahead of the curve. There are several paths the company could take. The view is that will take some time, but we should go down that road sooner."
Jeffrey Jones