Calculating book value: Case study, Petrobakken (PBN)

The value investor should pay attention to book value (assets-debt). I aspire to be a value investor, but I depend on stock analysts to do part of the work for me. Here is my dilemma. The discount brokerages make some of the research available to their clients to encourage their clients to invest in stocks. This generates revenue for them, as they depend on commissions. This is one reason to hold in suspicion their recommendations, since they will often be more optimistic than they should. If I always obtained the 52-week target price that they suggest, I would be probably be fabulously wealthy. That being said, their information is nevertheless very useful to me.

But what happens when their numbers don’t appear to agree, either with each other or with the reports from the company in question. Consider the case of Petrobakken, which both TD Waterhouse and Scotia Capital give a high rating. A couple of days ago I blogged that I would buy some shares, and I did, though the stock has continued to drop. Not to worry, I calculated that this growing oil-weighted company was selling at less than shareholder’s equity/book value; typically, if a private investor wanted to come in and buy the company, they would have to offer the shareholders premium on the book value in order to convince the majority of shareholders to relinquish the company. That means that Petrobakken is selling at a discount. I calculated the book value based upon  their quarterly report (in billions) as 5.5 (assets)-0.698 (net debt) / .188 (total shares)=$25.54 per share.

Now it is interesting to me that on TD Waterhouse website under markets and research, PBN is listed as having a book value of only $17.18:


Analyst Jason Bouvier for Scotia Capital lists PBN’s “value” at 4.467 billion and its net debt at 0.902 billion. Analyst Roger Serin at TD Newcrest (TDSI Morning Action Notes, August 11, 2010) reports PBN net debt as 1.642 billion. He provides the following explanation:

Balance Sheet – At the end of Q2/10, the company had net debt of $1.48 billion, with $557 million drawn on its recently revised covenant based $1 billion credit facility (previously $900 million reserve based). At year-end 2010, we forecast net debt of 2.5x trailing cash flow and 14% available on its current facility, or 30% with working capital deficit. Net debt includes US$750 million convertible debentures due 2016. We also note PetroBakken pays annual dividends of ~$180 million, providing additional flexibility.

I see. The debentures are added to the debt which is only correct. Using this measure we arrive at the following book value (in billions): 5.507-1.448/.1886=$21.52 per share. This is higher than the book value indicated on TD Waterhouse’s Markets and research page, and it is the price at which I purchased shares earlier this week.

Of course Petrobakken at the end of their report explain how they calculated “net debt”:

Non-GAAP Measures. This press release contains financial terms that are not considered measures under Canadian generally accepted accounting principles (“GAAP”), such as funds flow from operations, net debt and operating netback. These measures are commonly utilized in the oil and gas industry and are considered informative for management and shareholders. Specifically, net debt is used to evaluate financial leverage and includes bank debt plus and accounts payable and accrued liabilities, less current assets. Operating netback is determined by dividing oil and gas revenue less royalties, transportation and production expenses by sales volumes. Management considers operating netback important as it is a measure of profitability per barrel of production. Net debt and operating netbacks may not be comparable to those reported by other companies nor should they be viewed as an alternative to net income or other measures of financial performance calculated in accordance with GAAP.

There is no mention here of debentures. And this could explain the difference. Thus, there seems to be different ways that debt is calculated, and the DIY investor must be aware of this and dig a little deeper to make sure that the data being reported is accurate.

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One thought on “Calculating book value: Case study, Petrobakken (PBN)

  1. Pingback: Book value as a determinant for buying a stock: The case of Petrobakken « The Righteous Investor

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