Timing is everything with investment opportunities.
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Granted, timing the overall market on a day-to-day basis is a fool’s errand.
But if you can jump on board a company just before key catalysts remind the market of its value proposition...that’s a recipe to make money.
Such an opportunity is developing with InPlay Oil (IPO.TO; IPOOF.OTCQX) a Calgary-focused oil and gas producer that has used the year lost to Covid to retool and gear up for the post-Covid surge that seems directly ahead.
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| InPlay is focused, with 90% of its light oil production from the Cardium Formation in western Alberta providing top decile returns |
InPlay is on the cusp of record production and cash flows, and yet it’s still trading at a steep, pandemic-induced discount.
Better still, price hedges put in place to get through last year’s challenges are about to fall off…and unleash the cash flow potential of its assets.
Jeff Bezos once said: “If you look at academic studies, you can see that stock prices are most closely correlated with cash flow. It's such a straightforward number. Cash flow is what will drive shareholder returns.”
And, as you’re about to see, InPlay is primed to start kicking off boatloads of cash.
For some idea of the scope of the potential here, consider this:
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InPlay Oil’s producing assets will soon be kicking off a lot more cash than they did when the company traded for nearly C$2/share — a level more than 1.5 times current trading levels.
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Combined with an oil market that continues to rebound strongly (and that historically has risen strongly in times of rising inflation), this confluence of events sets up InPlay Oil as a near-ideal vehicle to leverage oil’s return to form.
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Reserve Growth, Increased Efficiencies
In The Year Of Covid
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It takes a veteran team to manage through a crisis, and that’s exactly who InPlay had at the helm for The Year of Covid.
InPlay President and CEO Doug Bartole shepherded the former Vero Energy through the Great Recession and sold off that company’s assets in stages in 2012 for over C$400 million, generating a handsome return for early Vero investors in the process.
That experience guided Bartole and his team in 2020, as the company implemented shut-ins and curtailments in the early part of the year to avoid having to sell production and reserves at a loss, and they reduced costs by 25%.
Then, in the back half they approved targeted capital expenditures that made InPlay one of the first companies to get back to pre-Covid production levels.
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| Even during a Covid-challenged 2020, InPlay managed to do something few of its peers could — increase reserves. |
And as you can see from the chart above, that effort allowed InPlay to actually increase reserves in a down year.
Both accomplishments are now about to pay off in spades for the company and its shareholders.
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Record Production, Cash Flow Expected In 2021
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That’s because management is forecasting record production for the year of between 5,100 and 5,400 barrels of oil equivalent/day, with 69% of that production in liquids.
And here’s the key: C$8 million in hedges used to manage through the crisis will fall off at the end of Q2 2021.
As a result, InPlay is projecting record cash flow in the back half of the year (based on price estimates well below today’s oil price.)
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| InPlay is forecasting record production, adjusted funds flow and free adjusted funds flow in 2021. |
Management is projecting adjusted funds flow (AFF) of between C$39.0 million and C$42 million for the full year and free adjusted funds flow (FAFF) of between C$15 million and C$18 million.
And with the C$23 million capital program InPlay is executing this year, reserve and production growth from the current forecasts seem extremely likely.
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A Clear Shot At Generous Returns
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In many ways, InPlay’s story is a simple one of improving free cash flow at a time when investors are beginning to rotate back into the oil and gas sector.
These investors may start with the senior producers, but eventually they’ll find their way to the junior exploration and development space to maximize leverage.
And that leverage could be significant.
Consider that InPlay generated C$25 million AFF in 2017, when the company was trading near the $2 level and at a C$130 million market cap.
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As you’ve seen, InPlay is on the cusp of producing around C$40 million in AFF in 2021, and yet it currently trades at just around C$0.75 (or just under a C$50 million market cap).
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By the second half of the year, InPlay will be spinning out cash at a C$50 million annualized rate!
The potential for torque on a revived energy market is obvious here, and your window to build a position in InPlay Oil, before the nickel drops for the rest of the market, will likely close quickly.
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