Lightstream (LTS) – When The Market Freaks Out, Rejoice

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Lightstream (which I’ve covered in-depth here and here) reported results last week (here). Included in those results was a downward revision to 2014 production volume, from 44k boe / d to 42k boe / d. The market did not take too kindly to the Company’s lower forecast, sending the stock down 10%.

But the market isn’t paying attention to the right things. And investors that know better should rejoice because acquiring ownership in LTS just became a lot cheaper. It’s a mantra that needs to be hung on every investor’s wall:

When the market freaks out and you know better, rejoice.

To the informed investors of Lightstream, this is what matters:

What’s interesting – and a point the market has clearly ignored – is that funds flow (operating cash flow after interest expense) is still expected to meet guidance. I repeat: there was no change to projected cash flow.

Looking at the Company’s new guidance, FCF is expected to be $85MM – $165MM. To get to sustainability, take out the approx. $95MM in 2014 dividends. The midpoint implies $30MM in cash buildup – that’s after CapEx, interest and all dividends. This means that the market’s biggest concern about Lightstream – the sustainability of their business model – is no longer a concern. The inflection point of sustainability has arrived. And that is what matters.

Informed investors, repeat after me: When the market freaks out, rejoice.

10 Responses
  • gord Reply

    The selloff continues after announcement of recent divestiture. Some comments suggest assets sold were not the non core properties originally earmarked for sale and instead LTS sold off prime assets. Any thoughts?

    • analyst Reply

      Nonsense. Let’s stick solely to the facts:

      Lightstream announced the sale of 3,300 boe / d (96% liquids) of conventional southeast Saskatchewan production to Crescent Point for cash proceeds of $375MM plus certain Creelman lands valued at $3MM. Acquisition metrics were reasonable at, $114,700 per boe / d and $34 / boe (P+P; including $67MM of FDC) The assets also included 44 sections of freehold lands, which Crescent Point valued separately at $50MM (thus resulting in lower transaction metrics).

      In aggregate, LTS has sold 6,300 boe / d for $729MM. Avg boe / d was sold at $115k. Apply that to the rest of their portfolio (being conservative as you aren’t valuing the non-productive land and the assets sold weren’t prime assets) and you get a value of over $4.7BN (that’s $3.2BN of value left for equity holders). People should use their brains and recognize a buying opportunity when they see one.

  • gord Reply

    With the price of oil falling I assume that we are still far off from the point where your analysis becomes problematic. Never thought I would see the mid fives again on this stock. I have added recently at 5.32 and will sit and collect the handsome dividend. As you say talk about a market freaking out. LTS must be looking attractive to other players.

  • Beej Reply

    What do you think of the latest news and its effect on the stock price?

  • daniel Reply

    Third quarter results sent the stock below $3.00 C . With the price of oil at $80 / bl.,,, whats your position now on LTS. Can the stock
    recover and how and when can they turn it around?

    • analyst Reply

      What you do with LTS depends on your view of oil – how low will it go and how long will it stay there?

      If oil goes to $60 and less, LTS will cut capex and production will decline.

      If oil is at $70, LTS will be a no growth, no dividend company. They will probably sit it out as much as they can to protect their assets.

      If oil stays at $80, they will cut their dividend to reach 100% sustainability.

      If oil goes to $90 or more, they keep the dividend, keep reinvesting and print money.

      Duration of time also matters. Importantly, in none of the above cases is solvency a concern of mine.

      For the record, I manage my positions and have been sitting this decline out. I am waiting for oil to stabilize.

  • Beej Reply

    How would you factor in the strengthening US dollar? Is it possible that some of the drop in crude oil prices would be due to a strengthening US dollar? Could this help buffer the losses in profitability for LTS?

  • Sean Reply

    “Duration of time also matters. Importantly, in none of the above cases is solvency a concern of mine.”

    With oil under $60 and the stock at $1.30 give or take, has anything changed in your thinking?

    Thanks for your thoughts

  • Sean Reply

    I would sit this out until we find a bottom in oil, Right it looks like the higher costs/higher leveraged producers will slowly die off and unconventional oil will take a hit. as for lightstream, their prospects for 2015 aren’t looking very bright. They have a lot of debt and capex to take care of, I’m pretty sure they’ve also cut the dividend.

    • analyst Reply

      Agree; been out waiting for stabilization.

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