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Calvalley Petroleum: No Deep Drilling Required

A new conflict broke out in Yemen. For old-fashioned Graham & Dodd investors who like to run into burning houses, here’s an interesting idea: Calvalley Petroleum, a Canadian producer that drills – drilled? – across block 9, in the central part of the country.

The company sits on the best balance sheet ever seen in the oil and gas industry, with $114 million in assets, among which $70 million of cash already repatriated in Canada, and $9 million in total liabilities, for $105 million in equity marked at… $45 million on the Toronto exchange.

The math is straightforward: Assuming inventories, licences and fixed assets in Yemen are worthless or nonrecoverable – better safe than sorry – Calvalley trades at a discount of 26% on its net cash value – cash minus all liabilities.

Operations have been idle for several weeks and management just announced layoffs, salary cuts and the closing of the London office. CEO Edmund Shimoon owns a quarter of ordinary shares and the board has initiated a massive buyback program last year.

Noticeably, shareholding is divided between individuals of questionable reputation. Mr. Shimoon had some issues with the Alberta’s securities and exchange commission; Mr. De Combret has been involved in the Iraqi oil-for-food scandal; and Mr. Chaligné has been convicted for market abuse in the United Kingdom.

Calvalley nonetheless exhibits a great history of profitability despite the excessively risky context the company deals with. Hopefully management will keep returning cash to shareholders instead of opting to drill someplace else.

In 2012, Norwegian producer DNO expressed interest in acquiring Calvalley for $214 million.

(Long CVI at a price of $0,64 per share.)

April 9th update: The company winds down operations in Yemen and announces a special dividend of $0,80 per share.

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