Posted 01/22/2020

Grizzly Oil & Gas Ltd. (GRIZZ)

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Quality

I recommend a long position in Grizzly Oil & Gas Ltd. (TSX: Grizz) for up to 2.0x upside and worst-case downside of 10% downside.

Please note that the following recommendation contains certain AUVs that may not be suitable for all investors. We have chosen to focus the write-up on the TSX Venture Exchange as the primary vehicle for dissemination of the message of this investment is an exchange of ideas among investors. All investors are encouraged to conduct their own due-diligence and research the company’s shares on the websites of its primary subsidiaries.

Summary Thesis

Grizzly is a Canadian E&P company with interests in the US, Australia and Papua New Guinea. The company’s operating segments include offshore oil production, gas exploration and production, and natural gas exploration and production. Unlike many publicly traded equities, Grizzly’s financials and reserves are not closely scrutinized by any Bloomberg or Bloomberg Chemical type of coverage.

Grizzly has traded down from $36 per share in Oct 2012 as fears about the outlook for the Canadian oil sands have weighed down the stock. The stock is now back to over $30 per share as fears of over-leveraged and impaired balance sheets have dissipated.

In our opinion, a better, more focused balance sheet is currently obscured by legacy investments. At current valuation levels, investors are receiving Grizzly’s $0.89 per share cash balance in the form of a promissory note and getting a portfolio of producing properties almost for free. In addition, ~$2 per share legacy investments are payable to Grizzly from third parties who will use the proceeds to repay legacy debt.

With a clear, albeit delayed, catalyst, we believe Grizzly shares represent a great investment and are likely to benefit from a number of our criteria.

Valuation:

The market has rewarded Canadian E&P exporters with a premium valuation due to the previously mentioned over-capitalized balance sheet. Investors have paid almost 16x P/E for similar Canadian player Syncrude Energy (TSX: SNE), and we believe Grizzly shares offer an attractive mean to measure a Canadian E&P multiple. On a trailing basis, the stock trades at a 0.75x Price / Book Value versus Canadian peers at 1.09x. We also looked at peers on EV/EBITDA and P/Book and both showed substantial discounts to peers.