Compton Petroleum

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Compton Petroleum (TSE: CMT, PINK: CMZPF.PK) is a natural gas and exploration company in Canada that trades on the Pink sheets in the USA and the Toronto Stock Exchange in Canada.

For people who like to risk money with the potential of 5 or 10 bagging stocks I present to you this attractive little equity on the TSX.

Their stock price has taken a massive beating in the financial crisis as natural gas prices have plummeted and investors began to see their debt as a risk.

In 2010, when the stock hit a multi-year low, they were able to trim their debt and refinance their outstanding bond obligations.  the stock price appears to be pricing in bankruptcy, when in reality there is a lowish risk of this happening.  Two ways to play this one are buying the stock directly (which the author has done) or buying 3 cent warrants that expire in Sept 2011 with a $1.55 strike price.  

Canadian Natural Gas Play

Back to the two reasons the stock is down:

1. Analyst and investors feel that Compton cannot handle their debt.  However, they seem to be doing so relatively easily.  They continue to reduce the amount of debt outstanding and cutting their interest payments.   They have replaced bonds due in 2013 to those due in 2017, helping to alleviate the problems associated with long term debt coming due.  2. The other aspect of the low price is somewhat simplistic.  They delisted from the NYSE.  Because of this, many institutional investors sold out their positions.  This caused a drop in price.  In reality, this is a ridiculous drop in price, because the TSX listing is more than sufficient for this stock.

Let’s look at the fundamentals:  Their price to book ratio is 0.2, price to cash flow is 2.3.  This is a sign of a very undervalued company.

Compare Compton to some industry competitors.

COMPETITOR ANALYSIS Compton Eagle Rock Energy Partners EQT Petrohawk = 0.45
p/e n/a n/a 29 23
price per boe 10 9.6 includes oil 7.30
boe/day - approx 19,481 49283 103,448
per year 285,846 600000
p/b 0.14 0.68 1.88
cap 131m 413 m 5720m 5420 m

The bottom line is if this company survives, and we think there is a very good chance that it is going to, it will eventually soar in price as their leveraged nature & general cost cutting becomes a positive aspect rather than negative.

If you track Compton's figures, you see the change in their price is reflected in the fundamentals of gas price change

06 | 2010   03 | 2010   12 | 2009   09 | 2009   06 | 2009
INCOME  -52 16 -23 12 19
Total Current Assets   89 64 52 58 70
Total Assets   1,847 1,981 1,997 2,082 2,131
Total Liabilities   884 971 1,005 1,230 1,293
Total Equity   958 1,010 992 852 838
boE per day avg 19,481 19,411 21,440
ANNUAL figures
2010 thus far (2 QRTS) Dec-09 Dec-08 Dec-07 Dec-06 Dec-05
INCOME ANNUAL  -35 -8 -43 129 127 81
Total Current Assets  M'S 89 52 90 116 142 144
Total Assets   1,847 1,997 2,189 2,257 2,145 1,758
Total Liabilities   884 1,005 1,354 1,387 1,411 1,162
Total Equity  (book value) 958 992 835 870 734 596

More to come in the future on this topic. Value investors are awaiting eagerly. Our overall view of this stock is that it is a buy, but a cautious one at that.

Disclosure:  author is long Compton as of Oct 31, 2010.