TORONTO () -- Investors that follow RI are probably familiar with the Palo Duro shale play in Texas. There are a number of Canadian listed juniors operating in the area, every one of which has seen its share price come off significantly in the last six months. Most notable amongst these is Endeavour Financial backed, Bankers Petroleum [TSX:BNK]. Shares in Bankers closed the day at 68 cents, well off their C$1.98 high, and seem to be in absolute freefall.
What's the Problem?
Bankers has lots of cash, as the institutions that took down the stock at a buck and higher are no doubt painfully aware. The company also has a massive land package in the Palo Duro, where initial drilling seems to have the company on track, and indicates the potential for a company-making, Barnett sized reserve. In Albania, Bankers' production is steadily on the rise and the company is aiming for 10,000 - 15,000 bpd in the next four to six years.
Let's have a look at the company's share structure. According to the latest numbers the company has 404 million shares outstanding and 443 million shares fully diluted.
Despite the fact that Bankers is currently producing north of 3,000 bpd in Albania, their cash flow is paltry. This is a result of high costs, high royalties and taxes and laughable netbacks.
In the Palo Duro, while good things would appear to be happening, time is certainly not on your side, and shale gas will clearly always be discounted in any valuation or buyout scenario.
Furthermore, the work is extremely expensive. An industry insider told RI that Bankers is having all sorts of difficulties with their equipment, and effective extraction technology is far from a given at this point.
Valuation
At today's close of 68 cents, BNK has a market capitalization of C$275 million. Apart from the fact that there is nothing going on to get and keep investors excited, the market cap is the simple answer to the question: What's the problem? Albania doesn't come anywhere near justifying the current market valuation, and the value of Palo Duro is more or less in the eye of the beholder, at least for the time being.
Nobody wants to pay that much when everything is years away and there is nothing to get excited about now. Moreover, should everything actually pan out for Bankers in the Palo Duro and Albania, what's the most that you might make on your money, five years hence? A triple of quadruple if all if the stars align?
Conclusion
Those of you that follow your correspondent's work are aware that the resource sector is currently offering those types of returns on a number of quality vehicles in a much shorter time frame and with a much higher degree of certainty.
The path of least resistance for Bankers is to remain lower, because even at these levels shares in the company are too expensive based on what you can see and what you can't see. More importantly, the sector is rife with product, and the opportunity cost of holding Bankers makes no sense on a relative risk to reward basis.
