Cano Petroleum: Enhanced growth prospects

Billy Fisher | May 15, 2008 6:20am EDT | 1 Comment

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With the price of oil surpassing $125 per barrel and Goldman Sachs (NYSE:GS) warning us that it could go as high as $200 at some point in the next two years, the oil trade continues to be an intriguing play regardless of where your sentiment lies.

One small-cap oil and natural gas company that has been siphoning the benefits of rising oil prices is Fort Worth, Texas-based Cano Petroleum (AMEX:CFW).

The company was incorporated in 2003 as Huron Ventures. It changed its name to Cano Petroleum following a merger with Oklahoma-based Davenport Field Unit, Inc. in May of 2004. Cano has been publicly traded since June of 2004 and has experienced rapid growth during this time period. The company’s common stock has risen nearly 35% in just the past year alone. Shares closed at $6.91 on Wednesday — a level at which at least one analyst still sees a great deal of upside.

Mark Lear, an analyst for Sidoti & Company, currently has a “buy” rating on shares of Cano with a price target of $10. “Cano trades at a sharp discount to its peers on an EV/proved reserve basis; we contend that this valuation does not reflect potential upside of several core enhanced oil recovery projects,” he wrote in a May 9 research note.

The enhanced oil recovery (EOR) projects that Lear refers to are central to Cano’s business model. EOR utilizes methods such as waterflooding and gas injection to increase the amount of oil that can be extracted from a reservoir. Unlike many large-cap oil companies, $259-million market-cap Cano focuses its business on mature oil fields. Among the benefits of focusing on mature oil fields is limited competition as well as virtually no exploration risk since the company’s portfolio is comprised of proven reserves.

The company has oil and gas properties in Texas, Oklahoma and New Mexico. The concentration of its operations around these three states eliminates the risk of political instability overseas that multinational corporations might face on a regular basis. The company’s business model also contributes to the reduction of the United States’ dependence on foreign entities for oil.

Investors are banking on the notion that Cano’s monster third-quarter (ended March 31) revenue gain, released on Friday, is a sign of things to come. The company reported a net loss of $1.9 million, but its total revenue increased 98% when compared with the year-ago quarter. Cano recorded a net loss of $1.6 million in its third quarter of 2007, which included a non-cash charge of $3.2 million.

The steep rise in revenue is attributable to two factors. The first is the appreciation of oil and natural gas prices. The company realized an average of $93.16 per barrel of oil, which was a 64.9% improvement from the $56.48 per barrel it realized in the prior-year quarter. For natural gas, the company’s realized price per one thousand cubic feet soared 73% on a year-over-year basis.

The second factor that aided Cano’s revenue improvement was an increase in the production of barrels of oil equivalent per day (BOEPD). The company said this figure increased 10% on a year-over-year basis, to 1,495 BOEPD.

Analysts have high expectations for Cano’s upcoming quarters. The consensus estimate is that revenue for 2008 will come in at $40.7 million, up 43.3% from 2007. Analysts are then calling for another 90% pop in revenue in 2009. Wall Street is estimating that the company will check in with a net loss of $0.01 per share in 2008, but swing to a profit of $0.31 per share in 2009. “Cano appears poised to deliver peer-group leading production and EBITDA growth in its fiscal year 2009,” Lear wrote in a research report.

Potential investors should keep in mind that an investment in commodities, particularly in oil and natural gas exploration, is inherently risky. Cano’s profitability and growth prospects will hinge upon the prices of oil and natural gas, which have been historically volatile. And although the company is well-positioned to turn a nice profit in 2009, its earnings should be closely monitored given the capital-intensive nature of the industry in which it operates.

Cano’s strong quarter has pushed its stock price ever closer to its previous 52-week high of $8.85 it achieved in mid-October. It remains to be seen how this young company will be able to hold up over the long haul, but so far it appears to be headed in the right direction.

About the Author
Billy Fisher is a certified public accountant and and freelance investment writer whose work has appeared in Investor's Business Daily and The Motley Fool. Read More