Diversified Royalty and Athabasca Oil: Small-Cap Opportunities in Canada

David Barr and Amar Pandya of PenderFund Capital Management presented their in-depth investment theses on Athabasca Oil (Canada: ATH) and Diversified Royalty (Canada: DIV) at Best Ideas 2019.

Thesis summaries:

Athabasca Oil is a Canadian small-cap oil and gas producer focused on exploration and development in Alberta’s Western Canadian Sedimentary Basin. The company has a portfolio of long-life, low-decline thermal oil assets, light oil assets and long-term development assets. The company has had a tumultuous history as one of the largest Canadian IPOs, subsequently facing issues and controversies, culminating in a 90+% drop in the share price. Over the last few years a new management team has transformed the business, diversifying assets, finding creative ways to raise capital, entering JV partnerships, and completing an accretive acquisition. The company recently announced the sale of non-core infrastructure assets, which were receiving no implied value, for half the company’s market cap. The stock trades at 0.3x NAV, ~3x P/CF, with pro forma leverage of less than 0.6x net debt to cash flow. Amar expects proceeds from the recent asset sale to be used for redeeming high-yield debt (accretive to cash generation), creating a catalyst for the shares.

Diversified Royalty is a Canadian small-cap that acquires top-line royalties from multi-location businesses and franchisors. The company holds royalty rights to three well-tenured and defensible businesses and is seeking accretive acquisitions with the surplus capital on the balance sheet. The company is led by founder Sean Morrison who has a unique ability to source and structure royalty transactions in the Canadian market. Due to a selloff in Canadian small-caps, interest rate fears, and lack of news flow, the shares have declined and trade near 52-week lows, with an 8% dividend yield. This is a discount to less diversified Canadian royalty peers, which have historically traded at 5-7% yields. Once cash is fully deployed, the company should re-rate given the benefits of diversification and superior brand quality of the underlying businesses. Depending on various acquisition scenarios, DIV should trade at $3.50-4.50 per share, or roughly 40-60%.

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About the instructors:

David Barr is the President and CEO of Pender. He is also the Portfolio Manager of the award-winning Pender Value Fund and Pender Small Cap Opportunities Fund. He began his investing career in 2000, initially working in private equity. He joined Pender in 2003, was appointed Chief Investment Officer in 2007, before becoming President and CEO of Pender in 2016. Mr. Barr holds an MBA from the Schulich School of Business and earned his Chartered Financial Analyst designation in 2003. Mr. Barr is an advocate of value investing as well as being a true contrarian. He looks for value in unpopular places to find high quality businesses at a price that includes a “margin-of-safety”. Investing in a company trading below intrinsic value decreases the risk and increases the potential for generating significant long term performance.

Amar Pandya joined Pender in October 2017. He is a Senior Investment Analyst and Associate Portfolio Manager on the Investment Team. He started his investment career in 2011 in the Portfolio Management Training Program at The Great-West Life Assurance Company. The program provided Amar with experience in a variety of roles in Mortgage Investments, Fixed Income Investments and Equity Investments. Prior to joining Pender, Amar was an Associate Portfolio Manager at a large cap value equity investment firm based in Winnipeg, Manitoba where he specialised in the Industrial, Consumer, Materials, Telecom and Real Estate Sectors. Amar holds a Bachelor of Commerce degree in Finance (Honours) from the University of Manitoba. He earned his Chartered Financial Analyst designation in 2015.