Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: Sergio8 on March 06, 2019, 10:55:57 AM

Title: ORC.B - Orca Exploration Group
Post by: Sergio8 on March 06, 2019, 10:55:57 AM
Traditional high-quality value investing opportunities seem quite rare nowadays (at least to me). Here is one that "the grahamites among us" who are not opposed to owning high quality businesses should love.

Listed in Toronto (on CVE) Orca Exploration Group is a holding company (that publishes consolidated accounts only though we can easily distinguish what is owned at the holdco and subsidiaries with the available information) that holds the following assets:
- 135 M USD in cash and investments
- A 92.07 % stake in PAEM which holds 100% of PAET
- Around 60 million USD of Tanesco receivables (important note: they are owned by Orca, not by PAET)
- Some exploration rights in Italy

All of this trades at around 5 CAD per share, which corresponds to a market cap of less than 135 M USD at current USD / CAD FX rate (35.3 Million shares outstanding).
So we are essentially getting the 92.07 % PAEM stake as well as Tanesco receivables for free.

What is this PAET business and what is it worth?

I'll start with the PAET valuation, as I just need to prove that it is very positive for the investment to be interesting.

PAET has been recently valued at 265 million USD net of debt (325 million USD on a gross basis) in the Swala deal where Swala Oil & Gas took a minority stake in the company as shown here:

Swala might have overpaid, but the valuation doesn't look silly either. PAET will likely generate between 30 and 40 million USD in cash from operations in 2018 and this amount is likely to increase significantly in 2019 as daily production is expected to be between 50% and 87.5% higher than in FY 2018, as shown by the latest corporate presentation:
The company can produce those cash-flows with minimal sustaining capex (1-2 million per year).
The production should increase even more in the next 9 - 18 months as new gas plants come online in Tanzania.

So now, what does PAET do?

PAET is the leading gas producer in Tanzania. They sell natural gas at contracted prices (thus no risk from commodity price fluctuations here) to the Tanzanian utility (Tanesco) and to industrial customers.

PAET is profitable since 2003 despite lots of issues in Tanzania, the major one being that its main customer, Tanesco, did not pay its bills on time between 2012 and 2017, which resulted in the Tanesco receivables being written off the balance sheet.

The situation is currently normalizing as Orca is recovering those amounts (Tanesco is reducing its debt every quarter). The company expects to recover them in full as well as some interest for the delay (around 15 million USD).

This is a high quality business, with ROA higher than 25% and I expect that it will increase over time as Tanesco is now current on its bills and production is likely to increase (first in FY 2019, then even more in 18 months as additional gas plants come online in Tanzania).

PAET will operate its current field until April 2026, and the date may be extended in the future.

There are potential catalysts

- The company started to pay dividends recently. In FY 2018, we received 0.6 CAD per share in total. The company now intends to pay quarterly dividends, with 0.05 CAD per share in March. We can hope that the dividend will increase as the production increases.

- The company may use its excess cash for acquisitions as some Oil & Gas assets can be bought at reasonable valuations currently (some companies like International Petroleum are even built on this premise). The CEO believes he can target acquisitions at 2-3 x EBITDA multiples for assets that can be quickly cash-flowing and meaningfully increase FCF per share.

- The company is likely to screen on Price to Book and Price to Earnings as the cash builds up and earnings increase.

- Should Swala succeed in raising capital, they could buy up to 40% of PAEM at a 265 Million USD valuation. This would be huge!

The risks seem limited considering the current valuation

It would take a lot of bad things for PAET to have negative value: it should burn cash, or Tanzania would have to seize its assets and try to impose a fine to Orca. I believe the company is a good operator that was careful when writing its contracts in the first place and that Tanzania should not be interested in killing it when it desperately seeks more international capital investments.


I would say that value doesn't matter a lot here as we get everything for free, but let's take a quick stab anyway.

- Cash and investments can be valued at 135 M USD
- The PAEM stake can be valued at 245 M USD net of debt (Swala deal valuation)
- The Tanesco receivables can be valued at 60 M USD without accounting for interests (face value of receivables net of payables)

Summing those numbers, we get 440 M USD, or almost 17 CAD per share (say 16.5).

We may have some upside to that if a good deal gets done with the cash and when Orca receives interest from Tanesco, whithout even mentioning the possibility of an extension of Orca's contract in Tanzania beyond April 2026 (this would be huge).

We may also assign a holdco discount to that as management needs to be paid. Let us say that one compensates the other (as 15 million in interest should offset capitalized "compensation liability") and that fair value should be somewhere around 16.5 CAD per share.

Under any reasonable assumption, the optionality of this investment looks compelling to me: heads I make multiples of my money, tails I shouldn't lose much.

Just wanted to share that here before any catalyst may materialize (although the long-term outcome shouldn't depend too much on those). Interested in your views if anybody studied this business.
Title: Re: ORC.B - Orca Exploration Group
Post by: writser on March 07, 2019, 06:22:55 AM
Thanks for the write-up! Interesting idea. Couple of quick, stupid, questions if you don't mind:

1. Why did Orca borrow $60m from the IFC in 2015/2016 at 10% interest _and_ "an annual variable participatory interest equating to 7% of the cash flow of PAET net of capital expenditures" while they appear to have had more than enough cash in the bank? I guess they'd rather take out a loan at these terms than invest their own money in Tanzania? Or not? What was the upside here?

2. The company paid $2.6m "associated with the sale of the 7.933% interest in PAEM in January 2018 in accordance with the terms of the Loan". So I guess ORCA also pays a participatory interest if they sell a stake in PAEM, or at least as long as they are borrowing? Does that imply a ~$32m hit if they sell the entire sub?

3. Are the cash and investments on the balance sheet all at the holding level or are these assets held at PAET level? I.e. if some of these assets are at the PAET level they might already be included in the $265 valuation (i.e. as is the debt on the balance sheet).

4. At what point do they have to actually pay the 'additional profits tax'?

Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on March 07, 2019, 09:11:43 AM
Thanks for your interest and questions (that are far from stupid!).

1. Back in 2016, when times were extremely difficult in Tanzania, the former CEO (late David Lyons) did not want to commit Orca’s capital for growth capex and needed help from the World Bank to recover the Tanesco receivables (Tanzania / Tanesco received money from the World Bank when it was on the brink of bankruptcy). Orca has always kept the cash hoping to be able to diversify from Tanzania someday by making an attractive acquisition (they have been very patient). David Lyons always managed his companies carefully and didn’t want to commit Orca’s cash (of which a substantial part was his own).
Of note, Orca still guaranteed 30 million on the debt, though this is less than a year of cash-flows going forward. I expect PAET to stay profitable, so the guarantee shouldn't be accounted at the holdco level right now in my opinion (but should be right before the debt maturity, which is still quite far in the future).

2. Yes, you are right: under the initial deal, should Swala increase its stake to 40%, almost 35 million of IFC debt would need to be repaid, so ~ 32 Million remain (if Swala successfully raises the money to increase their stake).

3. Almost nothing is in Tanzania according to management (both late previous CEO and new CEO): Dividends to Orca are paid as quickly as practicable, and cash goes out of Tanzania almost as soon as it is received.
The PAET valuation was done on a cash-free basis and net of the full debt amount as shown by the link explaining the Swala deal (please see first post).

4. The full amount is payable at the end of the license in 2026 (this is a PAET liability as well) and the provision is regularly adjusted based on estimates of future production until that date.

Hope this helps. Feel free to tell me if anything is unclear.
Title: Re: ORC.B - Orca Exploration Group
Post by: Foreign Tuffett on March 14, 2019, 10:15:10 AM
Thank you Sergio8 for the idea.

My approach to valuing this:

1) Add up all their cash, investments, and other non-operating assets (TANESCO receivables, Swala preferreds). All together, I think these are worth ~$152 million

2) Subtract out the $60 million loan, and the estimated NPV of the "additional profits tax" liability ($42 million)

3) By my math, @ $5.05 Canadian per share you are "buying" their ~92% ownership of PAET for ~$84 million USD. That looks attractive relative where it was valued in the recent Swala transaction. Even if you discount to Swala transaction valuation by 50%, it continues to look attractive. 

This is a complex situation, and there are lots of estimates involved in the above #s.

As always, this isn't investment advice, and you'd be dumb to take investment advice on this name from someone (me) who only very recently learned the location of Tanzania.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on March 15, 2019, 06:26:58 AM
Thanks for your input Foreign Tuffett.
There is indeed more than one way to skin a cat, and your approach makes sense as well. I wouldn't call this situation complex though as we have a company trading at 3x FCF (expected to grow) on a market cap basis, without even considering its huge net cash position (135 Million if you look at Orca as a holding, ~ 75 Million if you only look at the consolidated numbers) and Tanesco receivables. If we account for cash and receivables (at any level), the future earnings power of this company comes for free!

In my opinion, this kind of price tag removes a lot of the complexity from this situation.

In my first post, I really tried to lay it out with my understanding of the "real structure and business" of this company though it is of course also very cheap on a consolidated approach basis.

In addition to what we already said, one could also argue that this company trades at half the valuation of the Swala deal alone without even accounting for any other asset (net cash + net Tanesco receivables).

The valuation is pessimistic from every angle I can envision.

Honestly (I could be biased / overconfident here considering that I have followed this business for a while), even though I bought my first shares at significantly cheaper prices in 2013, I would argue that the company has never been that cheap compared to its fundamentals in its whole trading history than it is today.
The situation was much worse in the past as the company's cash-flows were deteriorating, and all valuation multiples were higher (I would have been reluctant to talk about it as a conservative investment back then, though I already liked the situation very much).
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on March 20, 2019, 10:27:46 AM
Just published an article detailing my analysis of the company on SA:

This may be a good way to get the analytical process challenged by investors or get some feedback on this kind of ideas. We'll see.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on April 05, 2019, 09:53:40 AM
The valuation of PAET's reserves has been updated today:

These are now valued at $ 293 M USD on a PV 10 basis.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on April 12, 2019, 03:06:39 AM
Annual results are out.
Link to PR:
Link to AR:

Main facts:
– 2019 is likely to be a good year in terms of production and cash-flows: « Orca’s Additional Gas sales increasing to an average of 62 MMcfd for the first two months of 2019, compared to an average of 40 MMcfd in 2018 » and « it is expected that an additional 180
MWs of gas fired generation capacity will be commissioned in stages over the next six to eighteen months increasing gas demand by 35 MMcfd at maximum load». 2020 looks even more promising.
– CFO of $ 28 million USD was generated in 2018 (a bit below what I expected to be honest, though it will be much better in 2019).
– Tanesco continues to pay its bills (despite increasing amounts): « Subsequent to December 31, 2018 the Company has invoiced TANESCO $15.6 million for 2018 gas deliveries and TANESCO has paid the Company $18.0 million »
– The company confirmed that it expects to pay quarterly dividends going forward.

I updated my NAV assesment using the following up to date assumptions:
– ~ 135.5 millions USD in cash & investments
– PAET's gross reserves value at $ 294,4 millions USD (PV 10)
– Orca's pro-forma share of PAET's debt at $ 50 millions USD
– Net value of PAET's reserves: $ 244.4 millions USD
– Net Tanesco receivables: $ 58.5 millions (without accounting $ 25 millions of interest due for late payment)

NAV = 12.4 USD (slightly decreasing VS Q3 2018) or ~ 16.5 CAD (same amount as in Q3 due to USD appreciation VS CAD).

Q1 results are due in may and I expect them to be good.
I hope that increasing cash-flows per share will translate in higher dividends.
Title: Re: ORC.B - Orca Exploration Group
Post by: estoybien on April 15, 2019, 09:41:49 AM
You’ve convinced me to nibble on this (small stake) as I learn more about it. Thanks for the info.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on April 24, 2019, 08:58:23 AM
Thanks Estoybien, and feel free to tell us if you have an additional insight when you are done learning more about it.

We may note that, according to SEDI fillings, management (Nigel Friend & Pierre Raillard) received SAR and RSU. Should the stock price rise in the future, they are likely to make good money. If we assume that Orca's share price rises to fair value, they may earn more than $ 2 million CAD in bonuses. Orca used to settle these awards in cash in the past.

In my opinion, these awards may help align management's interests with shareholder's interests in the future. of course, I would be glad if it does!
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on May 06, 2019, 05:18:29 AM
New insider buy by CFO Blaine Karst: 4000 shares at 4.85 CAD.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on May 17, 2019, 07:46:08 AM
Q1 numbers are out and can be accessed here:

These numbers are fully in line with my estimates and tend to validate the thesis as:

1) Cash and equivalents (including $ 3.97 Mil USD of investment in Swala) increased meaningfully and reached $ 145,5 Mil USD, representing $ 4,12 USD / $ 5,56 CAD per share

2) Although Orca still provisions $ 58,5 Mil USD for Tanesco receivables, Tanesco keeps paying its bills despite increasing amounts: « Subsequent to March 31, 2019 the Company has invoiced TANESCO $5.6 million for April 2019 gas deliveries and TANESCO has paid the Company $9.2 million »

3) CFO (before interest payments) stood at $ 13,5 Mil USD in Q1 with contained capex.

My net asset value estimates are thus unchanged.

Next catalysts may be:

- Continued increase in sales and cash-flows (very likely)

- A quarterly dividend announcement (very likely)

- A good acquisition (if available)

- An extension of the Songo Songo license (we don't count on it, but it is possible as gas deliveries need to increase in Tanzania and PAET is the best operator there)

- Normal Course Issuer Bid (to be discussed by the Board on investors' request, though the Board would prefer to increase liquidity in the stock)

- A sale of the Tanzanian business (we don't count on it, but there have been interested parties in the past).
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on May 28, 2019, 09:17:08 AM
Mr Blaine Karst (CFO) looks more bullish on the stock than ever: he purchased 10 000 additional shares of the company recently as can be seen here and on SEDI:
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on May 30, 2019, 07:45:06 AM
I would like to share some highlights from the shareholder meeting yesterday (where there are usually no shareholders).

1) The situation of the company is better than it has ever been and, as shown in yesterday's press releases, the improvements in gas deliveries are now contracted through a long term agreement (

2) Capital allocation could improve in the future. The management and the board of Directors are fully aware of the fair value of Orca's shares and are inclined to consider share buybacks.

3) While waiting for it, we get an increased dividend (which is already an improvement):

3) Board compensation is aligned with the appreciation of the share price.

4) Management's operating priority is to get the Songo-Songo licence extended (which would significantly improve intrinsic value).

Overall, I believe our talks were (very constructive as I have had all my questions answered, even the most challenging ones.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on May 31, 2019, 10:02:41 AM
Orca announced today that it has received a bid at 7.5 CAD per share for the company. The Board has (rightly IMO) rejected that bid and announced its intention to buy back shares:

This is a huge improvement as every dollar spent on a buyback at these prices has an immediate return ranging between 100 and 200%. I can only applaud that move.

I believe recent changes in the management's mindset are strongly increasing our odds to realize good returns on this investment going forward.
Title: Re: ORC.B - Orca Exploration Group
Post by: Foreign Tuffett on May 31, 2019, 10:46:48 AM
Orca announced today that it has received a bid at 7.5 CAD per share for the company. The Board has (rightly IMO) rejected that bid and announced its intention to buy back shares:

This is a huge improvement as every dollar spent on a buyback at these prices has an immediate return ranging between 100 and 200%. I can only applaud that move.

I believe recent changes in the management's mindset are strongly increasing our odds to realize good returns on this investment going forward.

Based on Swala's most recent IR presentation the company is 45% Tanzanian owned. I see that a sitting member of the Tanzanian Parliament is the company's non-exec chairman. Does the Tanzanian government have an ownership interest in Swala?
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on June 01, 2019, 09:35:32 AM
The Tanzanian government has no ownership in Swala shares. The company is controlled by the estate of late businessman Reginald Mengi who recapitalized it twice.

If we want to be more precise, although the Tanzanian government has a share in any company through taxes, it only controls TPDC and Tanesco.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on June 04, 2019, 10:21:44 AM
Here is Swala's version of the facts regarding their proposal to acquire Orca :

What is interesting in there is not really the content in itself, but the following: " Swala respects the decision of Orca’s board to reject the Proposal and intends to review it in the context of recent operational announcements made by Orca subsequent to the date on which the Proposal was submitted to the Orca board".

It is my understanding that Swala could make another offer at a higher price.
Title: Re: ORC.B - Orca Exploration Group
Post by: Mitch07 on June 08, 2019, 06:43:30 AM
They could. But with that said, Orca was patient in working with Swala for well over a year based on the agreed terms of $130M for 40% of PAEM.  For Swala to come back and say they want the balance of the 92% of PAEM + Orca for $55M seems dubious.
Current cash and bonds should be around $150M. The $53M IFC loan and funds payable to TPDC should partially be offset by the Tanesco receivable. They seem too far apart at this time.

NCIB approval should be announced shortly. Last time they issued a NCIB I don't recall it purchasing very much of the Orca float at that time.
Title: Re: ORC.B - Orca Exploration Group
Post by: Sergio8 on June 10, 2019, 05:50:30 AM
Mitch, you are right on your remarks.

I'd like to make it clear that I don't count on any bid from Swala in the investment thesis. I just highlighted Swala's wording. Their bid is a much better idea (for them) than buying the remaining stake in PAET on the initial terms where they paid the full price for PAET's reserves because they felt confident about the possibility to extend the license. They couldn't have made it with David Lyons at the helm of the company, but I guess they hope to be able to have better deal terms if they acquire the company outright, and I guess they start a negotiation process with a low price for Orca.

They didn't make a lot of buybacks with the NCIB last time because Lloyd Miller III and David Lyons couldn’t agree on buybacks in the past, but their passing allows buying back shares now. I am not sure about how many shares will be available to trade though, and they could also tender for their shares at some point.

Title: Re: ORC.B - Orca Exploration Group
Post by: Mitch07 on June 10, 2019, 06:55:43 AM
Thank you Sergio.

The company confirmed this morning that it can purchase up to 1,000,000 class B shares beginning June 14th. Not sure how aggressive they can be but agree with your thesis that buying back the shares would be a greater investment than other options out there at this time such as investing in bonds or even purchasing another company.