The Warren Buffett quote “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” is a reminder of how being different from the herd pays off. This is true for both individual investors and management of listed companies.
Panhandle Oil and Gas Inc. (NYSE:PHX), a non-operating independent oil and natural gas company with drilling projects in Anadarko Basin, Fayetteville Shale, and the Oklahoma Woodford Shales, does things differently from its oil and gas peers. It elects to own its mineral rights, but does not operate any of its oil & natural gas properties. Panhandle Oil and Gas Inc. (NYSE:PHX) is rewarded with a low cost structure and operational flexibility as a result of its differentiated business model and strategy. In addition, it is the least leveraged and most undervalued among its peers, which deserves a buy in my books.
Non-operating model responsible for low cost structure
Panhandle Oil and Gas Inc. (NYSE:PHX) does not operate any wells on its own; instead, it works with other large oil & natural gas exploration and production companies for drilling projects. That means that Panhandle typically only incurs drilling and operating costs, while others foot the bill for geological and geophysical costs. At the 2013 East Coast IDEAS Conference, Panhandle Oil and Gas Inc. (NYSE:PHX) also shared that it was ranked among the top five U.S. oil & gas companies with the lowest finding and development costs per BOE in 2012. Furthermore, Panhandle only has 20 full-time employees on its payroll.
Ownership of mineral rights gives it flexibility
Panhandle owns the rights of about 255,000 mineral acres itself, unlike most of its peers. Panhandle Oil and Gas Inc. (NYSE:PHX) has two options when it comes to utilizing its mineral rights. Under the first option, it chooses to participate as a working interest owner for wells where it deems it economically feasible (and rewarding) to participate, based on its analysis of the potential of the geological reserves. Under the second option, it takes a royalty interest in certain wells by leasing its mineral rights to other companies. In this kind of scenario, it trades off higher potential profits from a working interest for safer profits with limited liability and investments.
Excellent capital management practices
Firstly, Panhandle has not done any secondary offering in its company history. Frequent capital raising results in shareholders being allocated a decreasing share of the company’s value because of the increase in shareholder value created being offset by the increase in shares outstanding.
Secondly, although Panhandle’s forward dividend yield of 1% is not very significant, it has a track record of dividend payment spanning more than half a century. Dividends are backed by positive operating flow for every single year in the past decade.
Last but not least, Panhandle Oil and Gas Inc. (NYSE:PHX) has a strong balance sheet with a gross debt-to-equity ratio of 15.7%.
Panhandle’s peers include Anadarko Petroleum Corporation (NYSE:APC) and Cabot Oil & Gas Corporation (NYSE:COG). Given that Panhandle has no analyst coverage; I use trailing P/E as a basis for valuation comparison. Panhandle is the most undervalued of the three with a trailing twelve months P/E of 40.