This month I added 42% to my position of TransGlobe Energy (TSX:TGL) on November 11th. This stock also trades on the Nasdaq as (TGA). I purchase on the Toronto Stock Exchange because I want to save my US funds for american stocks. This stock is now 2.2% of my portfolio.
I bought in at $3.35 a share Canadian and the stock price is now $2.65. My next buy point will be if it comes down below $2.50 (which it has since my posting this so I have bought 58% additional shares). It is not easy to be a contrarian because the market is going against you when you are buying but this is where I find business’s trading cheap and have to trust my value analysis is okay. This stock will be a good test case of the investment strategies I am using and the courage and conviction one needs for value investing.
In summary TransGlobe is described by GuruFocus as:
TransGlobe Energy Corp was incorporated on August 6, 1968. TransGlobe Energy Corp along with its wholly-owned subsidiaries is engaged in oil exploration, development and production and the acquisition of properties. The Company’s segments include Arab Republic of Egypt and the Republic of Yemen.
The company has good balance sheet fundamentals except their earnings power has been impacted by Oil commodity prices taking a serious nose dive. Their price is lower than their tangible book value (Tangible Assets minus total Liabilities) so their fair price by book value is much higher than what the market is valuing them in the stock price. They also continue to pay a dividend although they cut it in half recently.
It appears the two issues for the market are commodity price of oil and the fact the company which is Canadian has much of its operations in Egypt.
This investment is confidence in the company balance sheet to hold up until oil price stabilize.
Here is my evaluation and conclusion for TransGlobe:
1. The Balance Sheet
- Cash to Debt is 1.93 meaning there is almost twice as much cash on the books as there is debt. This is a solid position.
- The Net Current Asset Value (cash and short-term receivables less total debt/liabilities) is positive at $1.57 per share. This means before fixed assets like building and equipment the current assets can cover any liabilities the company has. This is very strong and only a few strong companies have positive Net Current Asset Vales.
- The Equity to Assets is .81 which is very strong.
- Interest coverage of any loans is 19.43 which is solid.
In summary the balance sheet is strong and even the bankruptcy price is about half of the stock price which gives me some margin of safety. Times are tough for TransGlobe but the strong balance sheet gives them some strength to weather the storm.
Also if the stock price is low compared to the tangible book value, other companies may bid for the company. In many of these cases a premium would be paid which is good for shareholders.
2. Earnings Power of the Assets
- With oil commodity prices dropping TransGlobe has had their profits evaporated and they have posted a loss in the last two quarters.
- As a result they have negative earnings and revenue growth.
- This will continue unless Oil can get up to around $60 a barrel from the current prices of the low $40’s. The low prices are a result of over production which is coming from the Saudis. This could be to push USA domestic fracking oil out of business to protect middle east market share or political pressure on the Russian economy. In the end all of the oil producers require the price to be higher so I figure at some point the oversupply will end and oil prices will increase although not as high as they once were. Either way I am investing that TransGlobes strong balance sheet will help weather the storm until the commodity price makes them profitable again or entices a larger company to bid for them.
3. Value ratios
- Currently there is no PE (Price to Earnings) or PEG (Price to Earning divided by growth) ratio for TransGlobe due to there being an operating loss.
- Only the Price to book value is relevant here and the price is only 30% of the book value meaning the net assets of the company are worth much more than the stock price making this an interesting company to own for me.
- Before the oil price drop TransGlobe was very profitable and had growing earnings. I am banking on strong earning power again when oil prices stabilize.
- My fair value for TransGlobe is $6.83 at the current time due to this being the Tangible book value of the company.
- The discount cash flow calculator cannot work this out due to the fact they have negative earnings but dissolution of the company at this time should bring $6.83 a share in theory.
5. Dividends please note they have cut the dividend so it should be under 5%
- Simply put without earnings dividends must come from cash on the balance sheet. Because of this the dividend has been cut from about 9.5% which was high due to the stock price dropping to under 5% dividend. I even believe it would be prudent to suspend the dividend until oil stabilizes.
- Before the oil price went down the dividend policy was a conservative payout of about half.
6. Qualitative Evaluation
- As above a big issue for the company is the oil commodity price. This has to stabilize for the company to become profitable again.
- Some are concerned about their operations in Egypt but so far it seems to be a healthy working arrangement to me. There was a concern about delayed payments from Egypt but the payments were made.
- The company has operated over 45 years, incorporated in 1968 indicating it has survived previous oil price crisis.
- Still there is risk here and the balance sheet is the only thing to hang my hat on and that is what I am doing. Because this is a small cap that I do not have as much exposure to as a company like Apple I will keep the allocation in the portfolio to no more than 5%. This is also to minimize the risk on the portfolio.
- Guru Ownership, of my favourite Gurus only Jim Simons holds this equity. I do not follow Gurus to make my decisions but always check if there is interest from mangers I follow.
- Insiders have been purchasing shares at this level.
7. Technical Analysis
- My next price target for this is $2.50. This is a ten year low for monthly closes. It has as of Dec 8th so I have added 58% to my holdings. This really challenges my nerve.
- This price area has been tested 12 months over the past 10 years.
From a balance sheet perspective I have enough faith in TransGlobe to continue to add to a position that is currently 2.2% of my portfolio. I am making an investment believing their balance sheet will hold up until oil stabilizes or a larger company bids for them.
I am not recommending that readers go out and buy this stock. You should do your own due diligence as there is risk with any stock and even more when a commodity dependent stock has it’s commodity price drop so significantly. This involves risk tolerance that is not for everyone.
StockStory is not a financial advice site and content should not be considered for investment recommendations.
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