Looking Back at Texas Vanguard Oil (TVOC)

I wrote about Texas Vanguard Oil in March 2011 - it was a great micro cap value idea. I guess at the time it was trading at $8.50 and seemed to be worth comfortably more. Today I was taking a look at what had happened to it subsequently. Management liquidated it at the top of the market in 2014 and paid out $13.11 per share:

The Merger is part of a plan to liquidate the Company and distribute the assets to shareholders. In the Merger, shareholders other than the majority shareholder and Chairman of the Board, Linda R. Watson (who owns a majority of the stock through Robert Watson, Inc., a company controlled by her), will receive cash in exchange for their shares, and their shares will be canceled. The Company will then own the non-operated oil and gas properties, some furniture and equipment, and the remaining cash that has not been distributed to minority shareholders in the Merger.

The amount per share to be paid to minority shareholders in the Merger will be approximately $13.30 per share, which is the estimated value of the Company (including the estimated value of the non-operated oil and gas properties, furniture and equipment) divided by the total outstanding shares.

After the Merger, the surviving company will pay cash bonuses to long-time employees and consultants as compensation for their past services. The surviving company will then pay all remaining liabilities of the Comp any and liquidate the Company by distributing the remaining cash and the non-operated oil and gas properties, furniture and equipment to the sole remaining shareholder.

The board of directors believes that this is a good time to liquidate the Company. We sold our operated oil and gas properties in 2013 because prices for properties like the ones we owned were near historic highs. In fact, prices are so high that we have concluded that it would be very difficult to purchase new properties to add to our portfolio, and to replace our properties that are being depleted through production, at prices that would yield a good return on investment given our small size and asset base. We believe that the best alternative for our shareholders is to liquidate our holdings and distribute the proceeds.

We have chosen this plan of the Merger followed by a liquidation because we want to accomplish two goals. First, as stated above, we want to liquidate the Company and distribute the proceeds to shareholders. Second, we want to pay long-time employees and consultants for their years of faithful service, but we do not want to have those payments reduce the proceeds to be paid to minority shareholders. We have never had a stock option or incentive compensation plan . The majority shareholder believes there is an obligation to compensate these employees and consultants, and she is willing to do so solely from her share of the assets of the Company. To accomplish this, we will (i) value the Company’s assets prior to making the compensatory payments, (ii) cash out the minority shareholders based on this valuation, (iii) make the compensatory payments, and finally, (iv) distribute the remaining assets to the majority shareholder.

When the liquidation/merger closed in fall 2014, the oil market had already collapsed, but the properties were sold in July 2013 when crude oil was over $100.

What great management and governance. I've never seen anything like it.

Micro Cap Value Idea: Texas Vanguard Oil (TVOC)

I have some more micro cap value ideas besides Conrad Industries. Next up is Texas Vanguard Oil (TVOC) which engages in the production of onshore oil and natural gas, mainly in Texas.

At $8.50, the market cap is $12 million and enterprise value is approximately $5 million. Annualized EBITDA (based on YTD) is $2 million, so EBITDA/EV yield is 40%.

As of December 31, 2009, the company’s oil reserves were 431,638 barrels; and natural gas reserves were 2,108,346 MCF. It also had 8,018.08 net undeveloped acres under lease. So, the reserves are 572,000 boe (assuming a 15:1 ratio), which means the EV/boe is $8.91. Net net current assets per share is $4.65.

Another way to look at the valuation is to take the net current assets and add the PV-10 of the oil and gas reserves. That gives a figure about 20% higher than the market price, although that's based on the PV-10 from 2009. Oil prices were much lower then, which means that both the quantity and valuation of the reserves are understated relative to what they would be today.

Whopper Investments has done a post about TVOC as well.