Rubellite keeps up its torrid pace of growth

Adding Mannville assets makes a lot of sense to me

Susan Ridell-Rose and Ryan Shay haven’t wasted any time since forming Rubellite Energy (RBY.TO) as a spin-off from Perpetual Energy (PMT.TO) a few short years ago. Today, the company announced the acquisition of privately held Buffalo Mission Energy (BME) for CDN$97.5 million.

At first blush that seems like a stretch for a tiny company with a market capitalization of only about CDN$140 million, but Rubellite financed the purchase with a combination of the issuance of 5 million Rubellite shares to the vendors, a second-tier loan from members of management at 11.5% interest for CDN$11.3 million, cash of CDN$62.7 million from an expanded credit line and assumption of BME’s existing debt of CDN$23.5 million.

The acquired assets already produce about 2,500 barrels of oil a day and at today’s prices and costs enjoy a netback of CDN$47 per barrel, adding about CDN$43 million to Rubellite’s cash flow. The purchase price is not much more than two times cash flow, and Rubellite will end 2024 with output running close to 7,500 barrels a day of high netback heavy oil from its prolific acreage in Clearwater and Mannville. I see 2025 cash flow north of CDN$100 million as a result and at a typical multiple of 4 x EBITDA the enterprise value of Rubellite should rise to the CDN$400 million level, debt will fall off quickly, and the share count will still be ~70 million, pointing to a per share value in the range of CDN$5.00, more than double today’s trading price of just over CDN$2.00 a share.

Rubellite is wise to partner with First Nations living in the area of its holdings. Those relationships are valuable to both parties and tend to ensure cooperation rather than the strife that often accompanies resource development in Canada.

I will do a more comprehensive valuation of Rubellite once 2024 results are published including a NI 43-101 compliant reserve report, which is fundamental to any serious valuation of an oil & gas company, and I don’t much faith in multiples of cash flow until I have hard data vetted by independent reserve engineers on the size and nature of the reservoirs being exploited.

But the stock market is like time, it waits for no man, and I will add to my holdings of RBY when the market opens next Tuesday and take a risk that I may be premature. Obviously if today’s collapse in oil prices turns into a rout, the whole sector will come under pressure and Rubellite won’t be spared in the carnage of a serious sell-off.

In my investing approach, a serious sell-off is not cause for alarm but is like a Black Friday sale at Wal-Mart and creates the rare but valuable opportunity to buy long term assets at deeply discounted prices. So I will be a bit cautious not to over indulge on Tuesday. I have often quipped that bear market opportunities should be enjoyed like fine wines, that is “in small sips”.