Book value as a determinant for buying a stock: The case of Petrobakken

At the current time, I am investing in the oil and gas industry for a number of reasons:

(1) Oil is a commodity based upon a US dollar price.  As the US dollar inflates, commodities will maintain their value.  As a result, there is likely a coming surge in the commodities in the market as everybody and his brother starts looking for value as they catch on to the severe devaluation of the US currency.  Already the Chinese, who are usually huge investors in US treasury bills, have begun to establish enormous positions in the Canadian oil sector.

(2) Current prices in the Canadian oil sector are mostly well below their 5 year highs.

(3) Canadian oil and gas companies pay really good dividends or distributions.

(4) Canadian oil companies, particularly in the junior oil sector, are often selling below “book value” or what is also called “shareholder’s equity”.

Today, for example, Petrobakken (PBN)  in their quarterly report stated that their total assets were 5.5 billion; their net debt 0.698 billion.  This means shareholder’s equity per share (total shares outstanding, 0.188 billion) = 5.5-0.698/.188=$25.54 per share.  I am not a stock analyst, so my calculations could be incorrect (and I would appreciate anyone correcting me on this).  Despite this report, because of the net loss during Q2, PBN shares fell to as low as $21.28 today, as disappointed shareholders dumped the stock.  Others like me were obviously establishing long positions.  I established long positions at an average of $21.56, which in my view means that I immediately gained equity of nearly $4 per share.  Meanwhile, before yesterday’s financial report both TD Waterhouse and Scotia Captial had given PBN excellent ratings, with a $30 and $31 52-week target price respectively [Update:  I learned that the book value of Petrobakken is probably closer to 21.52, and TD Waterhouse has lowered their 52 week target to $25].

I’ve read that Warren Buffet, the value investor par excellence,  does not like too much the commodities sector.  I comfort myself with the fact that there have been other billionaires who have made fortunes on black gold.

Canadian banks

Canadian banks have done very well and are strong in comparison to their neighbors to the south.  But one reason to be wary about investing in them is that they are expanding into the US.  While the bankruptcies are making it possible to pick up deals, my impression is that the US Federal government regulation which often led to bankruptcies is becoming worse rather than better.  Now RBC (RY) is selling a US insurance company that they picked up a few years ago, which may be an indication that they too realize that that business is becoming more difficult in the US.  But it is not surprising.  Obamacare is going to bankrupt the health insurance companies.

Despite the strength of Canadian banks, I am down to an uncovered put on BNS (agreement to buy at $45).  It’s been a great run for me.  I’ve traded successfully on TD, RY, NA, though I lost on BNS and LB (but I have overall net gain from my positions on the banks–thank you very much!).