Alas, as some readers like to point out, The Contra Guys are not perfect. Mistakes are made and more are to be anticipated in the future. The oil and gas patch was a sector of particular hurt with stocks such as Bellatrix Exploration, Cathedral Energy, Obsidian Energy and Pengrowth Energy all sold for big losses. The best that can be said about our experience is that the wounds suffered could be used against our stellar gains to pay less to the taxman. Definitely not a win, but at least, less of a thrashing.
Of course, a major reason for the harsh beating was that oil and gas prices tanked. Remember that? We do not know of any person who forecast that oil prices would drop to such a lowly level, even going negative for about a nanosecond. Certainly, we did not foresee it.
However, as Benj outlines in his best-seller, The Contrarian Investor’s 13: How to Earn Superior Returns in the Stock Market, one pillar of his system is to constantly shoot for home runs and grand slams. That means looking for a minimum gain of 100 per cent, often upwards of 400 per cent. Worth noting is that all of the chosen stocks traded at those elevated levels in the past: nothing pie-in-the-skyish here. We never ask a stock to do something it hasn’t done before.
One of those companies was written about in this column two years ago: Vaalco Energy Inc. (EGY-N), a Houston-based oil and gas outfit. Benj bought it at 85 US cents in May, 2020, and a month later, when the article was published, it had already run to US$1.20. The piece, Why We’re Expecting a Four-Bagger from this Little-Known Energy Stock, did far better than that: 40 per cent was sold last month at an average price of US$7.90. This leaves 60 per cent in the till to still be reckoned with.
There were good reasons to avoid this smallish company. Political instability was a key one as the operations are in Gabon and Equatorial Guinea. Plus, hard to believe now, but there were questions in 2020 about whether oil and gas prices would ever recover. What a difference two years make, eh?
Let us imagine a bit: If the four companies mentioned at the outset of this article all went bankrupt, the gain on Vaalco still would have meant a mighty fat win, tallying about 60 per cent if an equal amount had been invested in each of the four companies, and all of EGY had been sold at US$7.90. The dividends received would have increased the return even further. A major win can offset numerous gaffes.
Of course, our goal is not to just succeed on one out of five companies. And the duds were chosen from enterprises over a number of years for this exercise. But this outlines the excellent outcomes that can be achieved – even when the plan is shot through with failures.
With a lovely win in the bag, the question becomes: What to do with the remainder of Vaalco? The fourth-quarter results reported in March were exceptionally strong, at 58 US cents per diluted share versus a loss of 6 US cents in the prior year quarter. Drilling was successful with another well placed in production, adding to the reserves that jumped 250 per cent from a year ago. Cash flow was positive, enough to fund operations and exploration.
In fact, the numbers were so good, that a dividend was implemented at 3.25 US cents a share, which works out currently to about 2 per cent. On average, stocks that commence a payout do better than the overall stock market for the next three years. The enterprise has lots of money in the bank, US$48.7-million, and here is the kicker and the reason that Benj liked the company so much: There was, and remains, zero debt. There are not many companies in the oil and gas patch that can crow about this.
What is a secondary sell target for this position? It seems reasonable that EGY can hit double digits from the current level of US$6.79 and it would not surprise to see it double from here. Of course, oil and gas prices are a major factor, but fortunately to some degree this corporation is insulated by its hedging position. In addition, a major recession, which would not surprise, could kick the stuffing out of commodity prices and that would heap a hurt on Vaalco.
As an aside, Cathedral Energy and Obsidian Energy have recovered in spectacular fashion. Cathedral has soared more than seven times from its 2020 low, while Obsidian has flown about 45 times higher from its low the same year. Benj wishes that he held them in his registered retirement savings plan or tax-free savings account. If that had been the case, he might not have sold them.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
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