Another one of my holdings is Orca Exploration (ORC.B). I've been following this one for about a year and (luckily) took a position a couple months ago just before it started this breakout rally. Orca is basically a natural gas producer operating in Tanzania in partnership with a government owned company called TPDC. During the past few years the company has been plagued by problems starting in 2011 with the accusation that they were cheating the government for some $20M in revenues. Those accusations turned out to be false as this $20M was due to an accounting error in the government books. Meanwhile Orca's largest customer, government owned utility company TANESCO, was cash strapped and started delaying payments to Orca and to this day still have $45M+ in arrears. This has been the biggest problem with the company. There is also an ongoing dispute between Orca and TPDC regarding $34M of costs that were recovered by Orca from 2002-2009. This issue is not as big as the overdue accounts receivable from TANESCO in my opinion and may end up being resolved by an arbitrator.
The stock broke out above $3 about a month ago when the company announced that there was negotiations with 3rd parties regarding a range possible transactions with the company which includes the possibility of a financing, the sale of the entire company or a sale of assets. The rally was further extended when Q2 results were released last week which indicated that the arrears situations with TANESCO has notably improved. TANESCO had made significant payments to Orca during q2 and subsequent to it whereby Orca now has a cash balance of $60M or $1.69/sh. That's quite large and it's about double the cash they had at the beginning of the year. TANESCO is still $40M in arrears but in the words of the company, the situation has "stabilized" and if this trend continues a large black cloud will be lifted from Orca.
Tanzenia is hungry for more electricity and the country is subject to brownouts. As a result, there is presently a capacity expansion project in the country which should be completed by mid 2015. Orca owns significant gas assets that would be able to supply the feedstock for this expansion which would give the opportunity for Orca to just about double their current production. However, to do this Orca would need to invest a large amount of capital and is not willing to deal with TANESCO regarding this expansion unless among other things, TANESCO pays up what they owe and there's some sort of payment guarantees for future delivery of gas. If not, Orca has the right to seek other buyers for their additional gas but I'm sure it would be in everyone's best interest if they sell their additional gas to TANESCO.
Orca's fundamentals look pretty good right now and momentum appears to have finally swung in their favor given the significant improvement in the balance sheet due to what appears to be a turnaround in the arrears situations with TANESCO. Tanzenia is getting aid from the World Bank which is probably why they are starting to pay their bills more. Orca also has a huge potential growth catalyst in the not too distant future. Compare the q2 stats that Orca has now to that of 2010 which was prior to when problems started occurring:
q2 2010 q2 2014
Net CF from operations (YTD) 0.33 0.45
Cash per share 0.61 1.69 (present day)
Working capital per share 0.85 1.04
Debt nil nil
Book value per share $2.51 $3.62
This is a very basic analysis but the fundamental situation with Orca appears quite better now vs 4 years when the stock price was $4 and the company had no "issues". The stock climbed further to $7 before getting derailed by recent problems. The arrears situation with TANESCO resulted in mgmt making what I think are overly dire remarks in the financial reports in recent years always warning about how Orca may not be a going concern in the near future if TANESCO didn't pay up. Well, if you looked at cash flows from operations in recent recent years, it suggested that Orca was doing just fine.
2013 2012 2011 2010
Net CF from operations (000's) 22491 30883 4577 15537
The big drop in CF is 2011 is when TANESCO started becoming late in making payments but as you can see they didn't stop paying all together. These numbers are quite healthy given the market cap and debt free position of the company. Despite the problems the company has had in recent years, it has steadily grown both its cash and equity values which means there's not only been positive cash flow from operations but also free cash flow generation. With Orca's current $60M in the bank, they are by far in the strongest financial position they have ever been but yet the company still mentions going concern issues in the financials! Q3 financials are poised to be quite good from a cash flow flow perspective given that $18.6 M TANESCO has paid Orca since June 30th.
The company is fundamentally quite undervalued even with this move to $3.60 especially given the news of their significantly improved financial position. They have a reserve value of $11/sh and are poised to double production starting in mid 2015 but they will need some luck for that. The bottom line with Orca is that the "problems" that have plagued the company in recent years were not as dire as they appeared to be and they look to be at least stabilizing if not dissipating which should provide for improved investor sentiment and therefore higher stock price should the trend continue. The company may end up getting acquired or consummate some other transaction which presumably would result in further upside but if those talks should fail there would be sizable dip. The fact that 3rd parties are looking to possibly acquire Orca or get involved with them somehow indicates I'm not alone in thinking it's an attractive company at these prices.
