InPlay Oil Stocks: More Growth On The Horizon (TSX:IPO:CA) – Seeking Alpha | Vette Leader

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(Note: This article appeared in the newsletter on June 17, 2022 and has been updated as necessary.)

Note: This is a company reporting in Canadian dollars unless otherwise noted.

InPlay Oil (OTCQX:IPOOF) (TSX:IPO:CA) is until now another oil game that originally went public through a reverse merger with legacy Anderson Energy (AXLFF). Despite the company’s relatively small size, I found the support from the company that conducted the reverse merger impressive enough to cover the stock. This company got quite a scare in fiscal 2020 when cash flow plummeted to previously unimaginable levels. But fast-thinking management has embarked on enough value-added mergers to pay off the debt this fiscal year. After that, the company will grow and eventually sell at the right price.

InPlay Oil Growth History and Profitability History

InPlay Oil Growth History and Profitability History (InPlay Oil May 2022 Company Presentation)

Management has seen an impressive cash inflow through a combination of savvy acquisitions supported by stronger commodity prices. That quickly sent the worrying leverage ratio down. Management intends to repay almost all of its debt this fiscal year in a bid to permanently “calm down” any market worries about debt.

The most recent second quarter report demonstrated management’s focus on paying down debt by paying down approximately C$25 million year-over-year. The current environment has significantly reduced debt spending through some fairly generous amounts of cash flow.

The combination of organic growth and acquisitions has resulted in impressive growth per share from a very small initial manufacturing base. This company, like many others, went public with high hopes for profitable growth, only to face the challenges of fiscal 2020. Management was agile enough to meet Mr. Market’s needs quickly.

This company is unlikely to be an income vehicle due to the very small size of the company. Instead, the first priority will be to ramp up production to reasonable levels so the company gets through the next downturn with far better debt and cash flow ratios than it did in fiscal 2020.

Most know that 2020 is unlikely to be repeated any time soon. But there was now an industry downturn in 2015, 2008, and of course 2019 that was rapidly worsening more than anyone could have predicted. This has led many to act much more conservatively than has been the case in the past.

Many companies that acquire either use stock or sell stock as part of the process to keep debt low. The market is no longer willing to accept a “leveraged up” acquisition followed by sale of assets due to the fear associated with the challenges of fiscal 2020. As a result, the industry will have a number of very strong balance sheets for the foreseeable future. The money that enabled a lot of unsound production and leverage is now gone. The money that this industry knows isn’t going to suddenly go “wild” and do things that lenders know aren’t profitable.

InPlay Oil Second Quarter 2022 Operating and Financial Results

InPlay Oil Second Quarter 2022 Operating and Financial Results (Press Release on InPlay Oil Second Quarter 2022 Results.)

InPlay Oil has long had some of the most impressive netbacks in the industry. The production levels combined with this netback make for one of the more profitable small companies in the industry.

It should be noted that prior year earnings include the reversal of impairments permitted under Canadian GAAP but now permitted under US GAAP.

Rapid growth can be a risk in itself, as the logistical challenges can lead to quality and production issues. That hasn’t happened here before. Part of this is due to management’s and financiers’ experience building and selling businesses in the past. The saying “practice makes perfect” applies to this company in particular.

There is every chance that the company can grow fast in the future without getting caught in many growth roadblocks that hamper other managements.

The appeal of small companies often lies in the growth rate per share. The projected cash flow here is around a third of the share price. Given the likelihood of more deals in the future and decent organic growth in the current environment, this price is on the cheap side.

Operating results of InPlay Oil Alberta

InPlay Oil Alberta Results of Operations (InPlay Oil May 2022 Company Presentation)

InPlay Oil can benefit from smaller holdings than many of its larger peers. The company often grows by making “bolt-on” acquisitions of these smaller holdings. This type of acquisition is less risky because the management is familiar with neighboring acreage.

The province of Alberta is very supportive of the oil and gas industry. So the cardium is a good area to perform surgeries.

The wells are relatively inexpensive wells with lower reserves per well. But this feature makes it much easier for the company to adapt production to the conditions of the industry. The payback for these wells is very short under current industry conditions.

The Cardium itself has long been a productive area like the Austin Chalk in Texas. The piece, like Austin Chalk, has been revolutionized by advances in technology. This has enabled both tracks to make an unexpected comeback a few years ago.

The Cardium is a stacked game. Thus, there are several trends that contain potential commercial reserves that have not yet been explored. The result of continued improvement in technology likely means that the Cardium and associated intervals will be an important production pool for years to come.

The future

Management will focus on Cardium and Alberta over the next several years as the Company grows in size.

Profitability characteristics of InPlay Oil Cardium

Profitability Characteristics of InPlay Oil Cardium (InPlay Oil May 2022, company presentation.)

Obviously, in the current industry pricing atmosphere, the wells are very profitable. The only real goal is to maximize cost efficiency by achieving a desired level of production. This goal is supported by operating in a basin with many supporting infrastructures and deadweight capacities.

There is currently some cost inflation that the industry is having to contend with. Whether management will be able to offset this inflation through technological advances or some managerial actions is currently unknown, probably until the release of the next presentation.

This small business is one of the few that can grow and pay off debt. Many in the industry are concentrating on balance sheet restructuring in the current financial year. The well dip rate supports cash flow growth as it is far lower than many unconventional wells. As such, the payout is at a significantly higher level of production than many companies operating in the United States.

Payback is not only occurring at a relatively higher production level (compared to initial rates), but is also occurring quickly enough to allow management to drill a second well in the same fiscal year with the same capital. This is accelerating the build up of cash flow so the next downturn will come with significantly more production breaking even at lower levels.

Wells that have paid for themselves will produce during an industry downturn as long as the selling price provides a reasonable cash flow that exceeds production costs. Reporting can vary widely as costs are spread out over the estimated life of the well in quarterly reports. However, an environment like the current one allows the company to pay down debt while preparing for the next downturn with many drilling costs paid back. Aside from current production costs, there won’t be much if any costs to recoup during the downturn. That would allow management to simply cash checks on sold production while waiting for the next recovery.

This management will likely continue to build the company as long as the environment is favorable while attempting to eventually sell the company at the right price. For long-term shareholders, that can be a very tempting proposition.

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