Cano Petroleum (CFW)

Cano Petroleum (CFW) is currently trading below what I think is a conservative estimation of net asset value. Looking at the balance sheet as of 9/30/09, CFW has total current assets of $9.01 and $294.68 worth of PP&E. If we accept current assets at face value and discount PP&E by 50% (which I think is pretty absurd given that demand for oil and gas is not going to decline by a whole bunch), we get a value of about $156.35 for assets. With total liabilities of $96.85 the net asset value is $ and 46.48 million shares outstanding, we get a valuation of $1.28 per share. With CFW trading at $1.02 per share, this is a discount of 20.3%.

The price to book ratio is an extremely low 0.27, but keep in mind this is a company with a horrible earnings record. Negative earnings, margins, income, etc., have been the norm for this company for quite a while.

An additional consideration is the proposed merger between CFW and Resaca Exploration. If the merger goes through, Cano shareholders will each receive 2.1 shares of Resaca (owning 50% of the new company in the end) and the combined company will have a PV10 of $652.9 million (81% being oil). As far as I can tell, Resaca has $31.8 million outstanding debt and CFW has total debt of $55.86 for a combined $87.66. If the transaction goes through there will be 195.216 million shares outstanding (46.48 CFW shares multiplied by 2.1, then multiplied by 2 again as the CFW shareholders will only own 50% of the new company). Subtracting total debt from the combined PV10 and dividing by 195.216, we get $2.90 per share. Needless to say, this is a large discount to CFW’s current share price.

I am not an expert on energy companies and certainly in this situation it is mandatory to a LOT more work to fully understand what’s going on with both these companies. When a company seems to be trading at a large discount to intrinsic value, there usually is a very good reason for that. Understanding the reason is the only way one can eliminate or mitigate risk before making a decision.

Update: I have reworked some of the math regarding the number of shares for the new company. I’m only a bit more certain that the math is correct.