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Is Legacy Oil and Gas on the verge of a major re-rating?

Also: Petrobank makes a move to combine with another small producer. Can it finally get on track?

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Mar 7, 2014

by Max Fawcett

That’s what FirstEnergy analyst Cody Kwong seems to think. In covering the company’s 4Q13 results, Kwong noted that the company has expressed a desire to “alleviate the perception that its debt levels are too high to project a compelling enough growth vision for investors to take advantage of its meaningfully discounted valuation versus its peers.” That discount, Kwong says, is considerable, given that the company’s core NAV is $9.32 per share – quite a distance from the $6.75 that its shares traded hands for today. That gap could close if it can convince market watchers and institutional buyers that it has a handle on its debt load. “Successful execution of this strategy will prompt a swift re-rating of this stock in our view,” Kwong wrote, “and we would advocate the continued aggregation of shares ahead of this potential capital structure rejuvenation event.”

Meanwhile, long-suffering Petrobank (TSE:PBG) shareholders finally got a bit of good news, as the company announced that it was using its modest cash pile to combine with Touchstone Exploration (TSXV:TAB), which has production of approximately 1,700 barrels per day in Trinidad. FirstEnergy’s Darren Engels thinks that Petrobank’s cash, when combined with Touchstone’s current production and 2P reserves of 14 million barrels (Petrobank also has around 300 barrels per day of production of its own), will create a company that stands a chance of growing into a “well-capitalized oil-focused company.” Oh, and it will still own the rights to THAI, although that’s effectively been ascribed negative value by the market.

Still, it’s a positive for Petrobank shareholders, who have seen the value of their holdings rally by nearly 20 per cent today. And Engels thinks they could still double from here. “While the market will need some time to digest this news, it will certainly be positive for PBG shares today, as the market will ascribe value for reserves, and not just its net cash position. We are increasing our target price to $0.90/share and consequently, our rating goes to outperform.”


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