Thursday, November 17, 2011

Alamo Energy (ALME) Down Significantly Since June 2010

On days like this, when the broad market is down due to the slow-motion implosion of the Eurozone, I like to amuse myself by reaching into the pile of glossy mailers I've accumulated since last year to see how well some low-priced stock promotions have fared.  Many of them have not fared well at all.  Today's case study is Alamo Energy (ALME), featured in a four-page teaser brochure dated June 2010 from Scott S. Fraser's The Natural Contrarian.  The glossy claimed that ALME was on track for two major U.S. oil discoveries and that long interest from unnamed small-cap energy mutual funds were waiting to buy the stock if it broke above $5/share.

Check the share price history yourself on Yahoo Finance.  ALME dropped from $1.17 on June 30, 2010 to $0.33 today.  Net income has been increasingly negative since 2008.  Free cash flow is also negative; the company's recent sale of low-producing wells to raise cash is notable once we do some basic math. Netting $160K for well interests that produced 1600 bbls in a year values the recoverable resources at $100/bbl, a fair value given the current WTI spot price near $100.   The bad news is that, given the burn rate implied by their quarterly cash flow from operating activities, that $160K will last about three or four months.  The company only had $86K cash on hand at the end of July 2011 (according to their 10-Q for Sept. 14, 2011), so they will need to sell more non-core assets by February 2012, go further into debt (not good given their long-term debt load of $1.16M), or dilute shareholders by issuing more stock.

The Natural Contrarian ignores this very unflattering picture.  It reaffirmed a Strong Buy rating for ALME this past summer.  I have access to the exact same publicly available information as that newsletter but I cannot be so confident in Alamo Energy's chances for success.  I'm trying really hard to be nice here. 

Full disclosure:  No position in ALME, ever.