Perpetual Energy is undervalued

A tiny energy company with a blue chip team

Perpetual Energy (PMT.TO) has been in the doghouse for years mired in litigation over its sale of properties that had significant asset retirement obligations (ARO’s) and which subsequently failed. Receiver Price Waterhouse brought a claim alleging the sale was fraudulent and intended to leave buyer Sequoia shareholders and creditors with massive losses on the ARO’s assumed. The litigation has been up and down from the Alberta lower courts and court of appeal and required extensive disclosure by Perpetual who kept shareholders informed by posting the judgments of the various courts on its website together with the written arguments of the litigants.

Perpetual settled the litigation this week for $30 million payable over a number of years, free CEO Susan Riddell-Rose to turn her considerable talents to building Perpetual’s profitable oil & gas business. During the litigation, Rose created Rubellite Energy (RBY.TO) and spun off Perpetual’s Clearwater acreage into the newly created Rubellite creating a very profitable sister company to Perpetual, also managed by Rose and her team.

Rose is the daugher of the late oil industry legend Clayton Riddell, sister of Jim Riddell who is CEO of Paramount Energy (POU.TO) and wife of Mike Rose, the CEO of Tourmaline Oil (TOU.TO). She has a first class team at Perpetual.

Perpetual has a market capitalization of only CDN$35 million and is trading at $0.52 per share. By my estimates, at current natural gas prices, the company is worth at least triple that price.

Perpetual has high leverage to natural gas prices. At a natural gas price of CDN$5.00 a gigajoule, I value the company at over CDN$2.00 per share and at CDN$10.00 a gigajoule, I put the value of Perpetual shares at about CDN$5.00. Natural gas prices are currently in the toilet owing to a warmer than usual winter and high gas storage levels, changing hands in the spot market at CDN$1.60 a gigajoule. Rose wisely hedged 2024 production at CDN$3.00 a gigajoule at which level Perpetual is quite profitable.

El Nino Southern Oscillation (ENSO) is the primary cause of the warm winter, and reverses to La Nina sometime this year according to most meteorlogists. In parallel, the Kitimat LNG facility which will export 2 Bcf/day of gas (more than 10% of Canadian gas production) starts shipping later this year. In combination, the gas glut of 2023-2024 should turn into a gas shortage in 2024-2025. Gas prices hit over $10 a gigajoule in the recent past and another trip to double digits can drive Perpetual shares to about ten times current trading prices.

Today, debt is under control with most of the term debt owed to Rose, not the banks, making insolvency unlikely and I am confident this management team knows how to drill and to expand output.

Sure, there is a lot of risk in a small oil & gas company, but Perpetual combines manageable risk with a top drawer team and makes the company a decent speculation. So I am adding shares.