Malcolm Shaw of Hydra Capital's Top Picks

A geologist at heart, Malcolm Shaw began his career as a geoscientist at PanCanadian Petroleum (now Ovintiv) before pivoting to the investment industry. He has over 20 years of experience in resource investments, including his work as an international energy research analyst at Wellington West Capital Markets and Vice President at K2 & Associates Investment Management. Over ten years ago, Shaw joined Hydra Capital and now runs his own money under his own direction. Today Shaw sat down with our team at Streetwise Reports to tell us about his investment focus for the year.

In our conversation, Shaw reiterated that he doesn't recommend stocks. Instead, he simply shares his focus with his readers and allows them to make their own decisions — and Shaw is focused on value and companies he truly believes in. Every company featured on Shaw's blog he owns himself. 

A Focus on Value

While Shaw's specialty is in oil and gas, he has his sights set on any stock that shows promise and growth potential. In summation, Shaw likes stocks with real value. He told Streetwise he looks for asymmetric risk reward with a value backstop and prides himself on finding the diamond in the rough before everyone else catches up.

He said, "My brand is value, ideally with long-tail upside" and when it comes to oil and gas, Shaw believes that is where the real value lies. He said, "Almost nothing can move like energy stocks," especially small cap discoveries, "and the path from discovery to cash flow can be quite short if you’re in the right area.” "The market is not efficient in small caps, so somebody who has a specialized background in both the technical and market side of things, can have a competitive advantage.”

Top Three Picks

After giving us some background, Shaw shared his top ten and top three picks with Streetwise Reports. His top ten include AOI, PXT, CJ, ARX, AAV, MCF, CDR, TNZ, TAO, and VLE. MCF and CDR are the most speculative of all of those, according to Shaw. 

He told us that the last three were his top three picks for 2023. In a December post, he even said, "I think that all three of these companies have the ability to inspire hope in a sector that has been lost for years. He continued, "All three of the above names are small in terms of market cap. Tenaz’s market cap is just CA$56 million, Tag’s is around CA$80 million, and Valeura weighs in at about CA$145 million. Despite their small statures, I believe that all three have the potential to inspire investment in the junior international sector at a time when the majors are leaving a void in non-core optimization, exploration, and development projects."

So, we sat down with Shaw to go into a little more detail about specifically why he believes they are worthy of this acclaim.

Tenaz Energy Corp. 

Shaw spoke quite highly about Tenaz Energy Corp. (TNZ:TSX), a stock he's owned for about four years now. Tenaz is a Canadian energy company focused on the acquisition and sustainable development of international oil and gas assets capable of returning free cash flow to shareholders. It has operations in both Canada and the Netherlands.

He bought the stock based on the proven ability of its management team and the solid asset it has in Leduc-Woodbend in Alberta. Shaw explained that "What's unique about Tenaz is its team. It’s led by a guy named Anthony Marino, and the COO is Michael Kaluza . . . You will see they were instrumental in the building of Baytex Energy and Vermilion Energy, which are both giant companies today."

Tony has overseen everything from domestic to international, offshore, onshore, you name it, and so has Mike. They are also incredibly focused on their per share metrics; they never lose sight of value per share.”

Shaw noted that "Most companies don’t talk about per share metrics, but [for] these guys, it is their religion." He followed by saying, "You let these guys do their business, and you will do well."

As for the future, one of the things that has Shaw so excited is what this team plans to do. He told Streetwise, "The most exciting thing about them is their target production size is 50 – 100,000 barrels of oil equivalent per day, for which they also have the potential carbon capture capacity to produce on a net-zero basis."

Shaw finished with, "Tenaz is incredibly cheap on a fundamental basis. At the end of Q1, the company should have about CA$1 per share in net cash, and it is expected to cash flow around CA$1.30 per share in 2023. The stock is trading at around CA$2.25. That means it is trading at around a 1x cash flow multiple, which I think is ridiculous when you look at the quality of the board and management team. Tenaz is still under the radar of the market and institutions with one of the best risk-reward setups I think I've ever seen. I'm willing to be very patient with this one."

Tenaz has a market cap of CA$63.85 million, with 28.25 million shares outstanding. It trades in the 52-week range between CA$1.24 and CA$2.80.

According to Reuters, 8.81% of the stock is owned by management and insiders. Anthony Marino has 3.27%, with 0.92 million shares. SVP Canadian Business Unit David Burghardt has 1.15%, with 0.32 million. Michael Kaluza has 0.79%, with 0.22 million, and CFO Bradley Bennett has 0.64%, with 0.18 million.

13.02% is held by institutions. Vestcor Inc. has 4.02%, with 1.13 million shares. Polar Asset Management Partners Inc. has 2.08%, with 0.58 million shares, and Richardson Wealth Limited has 1.89%, with 0.53 million. The rest is in retail.

You can learn more about Tenaz Energy through its corporate presentation here.

Valeura Energy Inc.

Shaw calls Valeura Energy Inc. (VLE:TSX; PNWRF:OTCMKTS) the poster child for what could happen to Tenaz. Valeura is a Canadian oil and gas company focusing on assets with substantial near-term cash flow and mid-term reinvestment opportunities while pursuing a longer-term deep, tight gas play in Turkey. 

Last year, Valeura was trading at 70% of its cash value. Shaw also pointed out that "the company wasn’t burning much cash at the time," and then, late in the year, it announced its >20,000 bopd acquisition in Thailand.

"Since it announced that deal, the stock has been up by CA$2.40 a share," Shaw said.

He did point out that Valeura will eventually have to pay decommissioning obligations, and he does not know what that number will be. However, he said, "because there is an increasing amount of decommissioning in that area, those costs are coming down," and we may not see this decommissioning for another four to five years. In a recent blog post, he wrote about this, saying, "I understood that there must have been some decommissioning liability that came with the asset, but it was clear there was going to be a lot of torque to the equity."

Valuera has a market cap of CA$214.73 million and trades in the 52-week range between CA$0.41 and CA$3.13. 

According to Reuters, 17.37% of the company's shares are held by institutions. Baillie Gifford & Co. has 16.48%, with 14.36 million shares. Carmignac Gestion has 0.55%, with 0.48 million shares, and Wellington Management Company LLP has 0.30%, with 0.26 million.

2.06% of the company's shares are owned by management and insiders. Director James McFarland, P.Eng. has 0.63%, with 0.55 million shares. Director Dr. Sean Guest has 0.59%, with 0.51 million, and Director Ron Royal, P.Eng. has 0.42%, with 0.37 million shares. Chairman Dr. Tim Marchant has 0.35%, with 0.30 million shares, and Director Russell Hiscock has 0.07%, with 0.07 million shares. The rest is in retail.

You can learn more about Valeura Energy through its corporate presentation here.

TAG Oil Ltd.

Next, we talked about TAG Oil Ltd. (TAO:TSX), a stock Shaw has been following since 2009. TAG is a Canadian oil and gas exploration company pursuing acquisitions, exploration, and production in the Middle East and North African (MENA) region.

This is another stock that caught Shaw's eye due to its proven management team. One key person that got Shaw's attention was Abdel (Abby) Badwi. Badwi has an extensive history within the oil and gas industry, most notably according to Shaw, his work as the CEO and director of Rally Energy Corp. (RLYGF:OTCPK; RAL:TSX; RLE:FSE), for which he successfully led the sale of in 2007.

When Abdel (Abby) Badwi joined as chairman, Shaw thought, "Wow, why has Abby come to this company? There must be something here."

Turns out there was; two years later, Abby announced that TAG planned to develop what management believes is an overlooked unconventional oil resource in Egypt, much the same way that Rally Energy did under his watch some 15 years ago. The plan is to test the Abu Roash "F” source rock interval, a target that he says is being compared to the Eagle Ford shale in Texas in terms of its rock properties. "If this was in North America, this play would have been tested 10-15 years ago.” And while it took a while, Shaw believes it was worth waiting for TAG. Late last year, TAG announced that it had received a petroleum services agreement from Badr Petroleum Company to develop the unconventional Abu Roash "F” reservoir in the Badr Oil Field, a 107 km² (26,000 acres) concession located in the Western Desert of Egypt, which Shaw noted was "quite a good deal. Their terms are good."

Shaw went on to say TAG is "gearing toward a material prize in an existing oil field with all the infrastructure you could ask for right there, ready for oil. I think there could easily be 50 million barrels recoverable on the table here if their upcoming pilot program is successful, and that’s just on one-third of the prospective area.” Typically, Shaw isn't a fan of downside risks. With TAG, there is no production to fall back on, and the company has CA$30 million in cash," however, he went on to say, "if you really dig into the details of what TAG is targeting and its plan in particular, it clears the hurdle. I’m willing not to worry about the downside risks because of how compelling it is technically. That’s unusual for me, but once in a while, I will take a shot if a story checks all the boxes, as much as it can before it’s actually been tested.”

TAG Oil has a market cap of CA$100 million and 155.02 million outstanding shares. It trades in the 52-week range between CA$0.20 and CA$0.79.

According to the company,13.2% of TAG's stock is held by management and insiders. According to Reuters, Abdel (Abby) Badwi has 2.06%, with 3.19 million shares. Director Shawn Reynolds has 1.54%, with 2.38 million. Vice President and COO Suneel Gupta has 1.03%, with 1.59 million. CFO Barry MacNeil has 0.96%, with 1.48 million shares. CEO and Director Toby Pierce has 0.82%, with 1.26 million shares. Director Gavin Wilson has 0.74%, with 1.15 million, and Director Keith Hill has 0.16%, with 0.25 million. Hill is also the chairman of Black Pearl Resources Inc. (PXX:TSX) and ShaMaran Petroleum (SNM:TSX), and the CEO of Africa Oil Corp. (AOI:TSX).

Askar Alshinbayev, the Founding Partner of Meridian Capital Limited, personally has 10.98% of the stock, with 16.99 million shares. 

According to the company, 22.9% is held by institutions. Meridian Capital/YF Finance is the largest institutional shareholder at 19.9%, and Coronation Capital owns 3%.

 73.21% of the company stock is in retail. 

You can learn more about TAG Oil through its corporate presentation here. 

What's Next?

As the stock market continues its turbulence, Shaw rolls with the punches, but he doesn't do it foolishly. Instead, he will continue to use his geological background and keen eye for up-and-coming companies to continue focusing on stocks he believes are going places. You can read more of what Shaw is saying and follow him at The Hydra Blog from Hydra Capital Partners.

Disclosures for Hydra Capital

This is not investment advice, nor is it a recommendation to buy or sell shares in the company/companies mentioned.

The information contained herein is accurate to the best of the author’s knowledge, but the material and interpretations contained herein should be independently verified by any party using this information as part of any research, editorial, or decision making process. Any views expressed here represent the author’s opinion only, and as such readers should do their own research and come to their own conclusions if they are using the opinions contained herein as part of any larger due diligence process. The author may have long or short positions in the companies mentioned and may be buying or selling in the market depending on which way the wind is blowing at any given moment. Opinions are subject to change without notice. Prospective resources, predictions, comparisons, financial projections, and extrapolated metrics are, by their nature, subjective and interpretation dependent. The topics covered are highly speculative and involve a high degree of uncertainty and risk. Speculative companies can and do go to zero. By using this site, you agree that the author(s) and Hydra Capital is/are not responsible for any damages incurred by the use of the presented materials. Anyone reading these blog posts should know that they are the author’s thoughts and opinions, which are not to be confused with or construed as research reports.

Disclosures:
1) Katherine DeGilio wrote this article for Streetwise Reports LLC. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.

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5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of TAG Oil Ltd., Tenaz Energy, and Valeura Energy, companies mentioned in this article.