This Junior Energy Producer is Trading for LESS THAN CASH

Canadian Phoenix Resources Corp. (CXP-TSX/VEN, $1.32) is a junior oil and gas company that is trading for less than its cash value – $1.44/share ($66.7 million cash over 46.252 million shares out).

CXP recently sold its interests in the two subsidiaries that were responsible for almost all of the company's value, which leaves CXP debt-free with ample cash to possibly acquire a cash-starved and undervalued junior oil and gas company that could use CXP's financial resources in order to unlock value.

Net of transaction costs and settlement of a $2.1 million debt, CXP received net proceeds of $66.7 million, or $1.44 per share, from the takeover of its Serrano Energy Ltd. subsidiary by Baytex Energy Ltd. and a corporate reorganization of its Marble Point Energy Ltd. subsidiary. CXP did not wholly-own these subsidiaries, as they owned 53.7 per cent of Serrano and 58.1 per cent of Marble Point, and they continued to operate under existing management teams during the time they operated as CXP subsidiaries, which didn't make for a great fit.

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CXP went through a massive recapitalization in 2008 and as a result of the shareholder dilution and weak capital markets the company literally became a penny stock in 2009 as the share price reached a low of 1.5 cents. CXP's shares were consolidated on a 25-for-1 basis later in 2009, which provided tighter bid/ask spreads on trading in the shares. CXP has also seen more than its fair share of CEOs and CFOs over the past few years.

A possible scenario that could produce favourable results for shareholders is for CXP to undergo a reverse takeover by a cash-starved and undervalued junior oil and gas company with a strong management team that is capable of growing its reserves and production using CXP's financial resources.

CXP may potentially receive as much as another $35.2 million from the exercise of warrants that were recently repriced to an exercise price of $1.25. Management may have as much as $100 million in cash resources available for an acquisition if most of the warrants are exercised this year, which is a strong possibility since the exercise price for the warrants will adjust to $2.50 by January 2011.

CXP's shares are trading around the $1.25 exercise price for the warrants since the existing shareholders will be diluted. There are currently 46.2 million shares outstanding, so the exercise of 28.2 million warrants would bring the total share count to 74.4 million resulting in an estimated enterprise value of $1.34 per share as described below.

CXP has few assets other than its current $66.7 million cash balance as the company's remaining production is currently only about 24 boe/d, although CXP does also have behind-the-pipe production from an oil well in the Campbell area of Alberta, located 20 km north of Edmonton, that was shut-in due to a pipeline problem, along with a few other oil and gas wells on its other Alberta oil and gas properties that are awaiting completion and tie-in to pipelines.

Based on the 2009 year-end reserve report, CXP's remaining proved-plus-possible reserves are valued at $2.5 million discounted at 10 per cent. Adding $35.2 million proceeds from the potential exercise of warrants as well as the current $66.7 million cash balance and deducting $5 million for operating costs and future transaction costs for an acquisition results in an estimated enterprise value of $99.4 million, or $1.34 per share, on a fully diluted basis.

From a technical perspective, CXP's share price completed a double bottom in 2009, a bullish pattern indeed as the price has increased steadily since late 2009 (see chart above). As shown in the chart below, the price has breached the upward trend line as the rate of ascent has slowed down considerably. Given the $1.34 enterprise value, the downside risk for CXP shareholders should be minimal with any big share price decrease presenting an opportunity for bargain hunters.

The Bollinger Bands recently pinched in the one-year price chart for CXP's shares, which foreshadowed the sharp price moves over the past week (see chart below). In any event, the shares are likely to trade for less than CXP's cash value until management announces the next steps in deploying its cash resources.

CXP's major shareholders are Trapeze Capital Corp. and Trapeze Asset Management Inc., who collectively own 14.4 per cent of CXP's common shares and warrants to purchase another 2.5 million shares, and a group from California known as the Rule Family Trust with ownership of 13.5 per cent of CXP's common shares and warrants to purchase another 4.6 million shares. Those shareholders purchased most of their shares at significantly higher prices, although the Rule Family Trust filed an Early Warning Report in July stating that they had recently purchased more shares of CXP.

Now that CXP is all cashed up again and looking to deploy those funds with another acquisition, hopefully management will actually achieve its stated objective of maximizing shareholder value.

I own CXP shares, so I'm not recommending investors either purchase or sell shares of CXP. Some of my shares were purchased at significantly higher prices and some were purchased about a year and a half ago. Keith Schaefer owns no stock or has any financial interest in Canadian Phoenix.

Brian Hoffman, CA, CPA, is a member of the Canadian Society of Technical Analysts (E-mail: bk.hoffman@rogers.com)

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