FEC Resources: Money for Nothing and Gas For Free

By Zac Bissonnette

On Tuesday afternoon, FEC Resources (OTC Bulletin Board: FECOF) announced that it held 35% of a “world class” gas discovery with a proven minimum of 3.4 trillion cubic feet (TCF) of gas , with a potential of 20 trillion cubic feet. For the press release with details about the discovery, please visit http://biz.yahoo.com/prnews/060926/sftu120.html?.v.

It’s the true that the stock is up substantially since the announcement. But does the stock have more room to run? The answer is a resounding yes.

FEC Resources has reserves of somewhere between 1.19 TCF and 7 TCF off the coast of Palawan Island in the Philippines. By comparison, energy giant Chesapeake Energy (CHK) boasts total reserves of 8.1 TCF. So this is indeed a “world class” gas discovery.

According to British website “This is Money,” “Edison, the leading independent research group in the sector, says that based on just 3.4 trillion cubic feet of proven reserves, the current value to Forum should be around £63m – the equivalent of 221p a share.” (http://www.thisismoney.co.uk/investing-and-markets/tips-and-tactics/article.html?in_article_id=413074&in_page_id=23)

Since FEC Resources owns 35% of Forum, this works out to a value of over 41 million dollars, just from the present value of the minimum proven gas reserves: It also represents a premium of nearly 200% to FEC’s current share price. If 20 TCF of gas are there (this seems unlikely), the present value is over 240 million dollars. So whether the amount of gas actually there is at the low end of the range or the high end, FECOF shares are an exceptionally good bargain.

And then there’s the balance sheet, the reason that Eric and I first became interested in FECOF shares. It’s one of Benjamin Graham’s fabled net-nets. FECOF has a price-book ratio of around 0.7, with over 90% of its assets consisting of cash and short-term investments. So FECOF was a heck of a bargain even before it turned out that they were sitting on huge gas reserves.

And one need not be an energy expert to invest in energy if the price is right. In a letter to shareholders describing an investment in shares of Arcata, a printing and forest products company, Warren Buffett described his efforts to value the redwood lands that the company had:

“We had to ask ourselves what the redwood claim might be worth. Your chairman, who can’t tell an elm from an oak, had no trouble with that one: He cooly evaluated the claim at somewhere between zero and a whole lot.”

The company had enough other strengths that Buffett was comfortable buying the stock, and counting any profits from the redwood as a bonus. As it turned out, the redwood was worth a whole lot, and Berkshire earned a return of almost 100% on a holding period of about six months. Investors willing to tolerate the potential volatility of FEC shares should do as well or better.

Comments? Email me at TeenMoney@gmail.com
Disclaimer: Zac Bissonnette and Eric Schleien own share of FEC Resources.