Journey Energy (OTCQX:JRNGF) was one of the best performing stocks of 2021, up more than 1,000% against oil producer indices like XOP and oil commodity ETFs like OIL up 60 to 80%. Journey recently made an equity offering, which triggered a short pullback, but it is poised to roll out the product to grow and potentially outperform significantly again in 2022.

I discussed Journey publicly for the first time in years in an interview on BNN Bloomberg in December, which is a good basis for this article. I started talking about Journey after six minutes. “In this type of environment, companies like Journey are particularly well positioned.”

As noted here and elsewhere, Journey has two businesses: oil and gas production and power generation. This article will primarily focus on the oil and gas business, recognizing that Journey has power generation and infrastructure assets that are growing and could be worth a substantial portion of the company’s enterprise value over the next few years. coming years.

Journey has done a great job of settling its debt and weathering the downturn, but it has failed to communicate with the market and clarify its value proposition. As an example, the most recent investor presentation the company has on its website is from September 2021. And they have a broken link to a September conference presentation and my interview on BNN Bloomberg discussing it!

Investor Relations webpage for Journey:

Broken link to “Introducing Peter’s & Co.”:

These are important because they illustrate a significant gap in communication with the public market. This compares poorly to many other similarly sized publicly traded oil and gas companies and could easily cause the stock to be undervalued. It’s frustrating in the context of a stock offering, because they hadn’t updated their public information before the offering. The market reacted badly to this, despite issuing shares at around a 20% premium to VWAP (volume-weighted average price), and despite a substantial rise in the price of oil:

In its most recent disclosure, Journey reported a proven production reserve value of $193 million and a proven + probable production value of $229 million, using a projected oil price of $73. US WTI for 2022! At US$110 WTI at the time of writing and with the oil futures curve rising sharply, Journey’s reserve value could be 2x the stated value, or $8+ per share. And without hurdles, Journey is fully exposed to this advantage, which may be underestimated. This contrast between projected and actual prices can be seen on the website of GLJ, Journey’s reserves auditor:

Looking at Journey’s September 2021 presentation, it becomes apparent 1) how much cash flow and value leverage Journey has to raise oil prices and 2) how dated the presentation is and how easy it would be for those unfamiliar with the company don’t go far enough to notice. For example, the chart below shows a projected netback of $17 (net margin per barrel) and 7,600 to 7,900 barrels of oil equivalent per day (boe/d). However, after an acquisition in 2021, Journey has recovered over an additional 600 boe/d, which has increased production by over 8,000 boe/d, giving an “average” production forecast of 7,600 to 7,900 So there’s no clarity on how much Journey is likely to produce in 2022 (more than they’re showing!), and the netback is likely 2-3x the level shown with oil prices. much higher now.

With illustrated margins of 2-3x, Journey likely generates $70-100 million in free cash flow in 2022, compared to $35-37 million in 2021. That’s a huge difference, especially since the market capitalization is less than $200m (approximately $185m at time of writing), and net debt is less than $50m (likely ~$40m after repayment of debt by streams of cash and the recent stock offering). This puts Journey at around 2x cash flow, assuming a low net income of $40 on its barrels.

Where Journey gets really interesting is what it’s going to do with all that money and everything it can do. Journey sits on over 25 years of inventory.

And Journey’s returns on that $60 oil inventory ranged from 36% to 108%. These returns can be 2-4 times higher as current prices are much higher, with paybacks within months in some cases!

This means Journey has decades of inventory which it will likely accelerate development and increase production and cash flow, while further improving margins by adding new production at lower cost. How much will he grow? Where will he drill? What was the use of the proceeds from the recent $10.5 million equity issue? We do not know ! And the market HATES uncertainty even more than it hates negative news.

The good news? The CEO of Journey was the founding CEO of Nuvista (OTCPK:NUVSF), a multi-bagger while he was there. And he was a senior executive at Bonavista, a 20x+ while he was there who also paid out his original offering price several times over in dividends. If Journey becomes diluted, it is likely to redeploy cash to earn a multiple of the equity raised. And even better, as we saw with the share price drop after the announcement, the market gives it and Journey no credit for using the money, despite returns which can be mid to high triple digit IRRs at current oil prices. And despite the latest dilution, for last year’s acquisition of Briko, which proved to be exceptionally accretive, despite the share value increasing more than 3x since then.

The ultimate value of Journey will depend on commodity prices and the execution of a plan that has yet to be communicated. However, based on management’s track record, undervalued equity relative to the value of production reserves, and a huge inventory of highly economic drill sites, there may be significant value unlocking at the as the plan is communicated and executed. I buy this dip from Journey’s stock.