Reflexions on Petrobakken (Updated)

UPDATE October 4, 2011:  Devon Shire discusses the most recent news coming from Petrobakken and I agree with his sentiments expressed there:  http://seekingalpha.com/article/297554-is-petrobakken-in-play

The market has punished Petrobakken (PBN), not on any substantive news regarding the operations of the company, but on a downgrade by BMO:

BMO downgraded PetroBakken (C$8.22, -C$1.12, -12%) to underperform, saying “with a dividend policy that is looking increasingly unsustainable, PetroBakken continues to increase debt to levels that may be difficult to recover from.” It also said potential funding sources for the company may not be as readily available as in the past, given financial-market turmoil. PetroBakken is owned 59% by Petrobank Energy (C$8.16, -C$1.17, -13%), which is also down Wednesday.

As a consequence of this and the general market weakness in the last few weeks, Petrobakken has fallen precipitously in market price, from a 90 day intraday high of $15.11 to its close yesterday at $6.40.  It may fall still further, as some bullboarders have suggested it could go as low as $3.00.

Here are the main reasons that I’ve heard for pessimism:

(1) The debt now stands at 1.1 billion plus 0.75 billion in convertible debentures.  The fear is that the company will have to stop paying out the dividend.

(2) Weakness in world oil prices.   This actually should be stated as fear that there will be weakness in the oil price.

(3) The world-wide monetary crisis continues, and a general credit collapse could result in PBN’s lender recalling its 1.1 billion dollar loan.

(4) Petrobakken has paid way too much for its land base.

(5) The business model for Petrobakken is unsustainable because of fast decline rates for wells.

(6) Investors and would-be analysts are worried that something else is wrong that the company isn’t telling us but about which Calgary insiders are aware.  (Of course I know of no professional analyst who has made such an accusation).

These fears aside, here are my reasons for bullishness on the company and why I see it as a value investment and not a “value trap” as some investors have suggested.

(1) Petrobakken has two major land bases on which they have identified hundreds of drilling sites, in the Bakken and the Cardium.  There are billions barrels of oil in these fields which oil companies have identified after several decades of vertical drilling.  Petrobakken is on the leading edge of new technologies to produce these resources, including horozontal bilateral and trilateral drilling and multi-fracking, which will make it possible to extract more oil  than possible with vertical drilling alone.  But because these are already explored oil fields, drilling is de-risked–this is not wild-catting–i.e., drilling to determine if oil is in the ground, but drilling in oil fields that are already well-analyzed.

(2) Petrobakken already has excellent cash flow despite slow downs in production caused by bad weather.  They are still confident to achieve their exit production estimate (46-49,000 bpd) by the end of 2011.  If they achieve this objective, the share price could easily be around $20 per share or higher (earlier in the year PBN reached $23 on news of the estimated exit rate).  The price to cash flow at yesterday’s close was an amazing 2.1x (source TD Waterhouse).

(3) The dividend at almost 15% after the share price drop, now will pay you to wait for it to go back up.  While BMO is not certain that Petrobakken can maintain its dividend, the CEO John Wright hit back hard, in speaking with the Calgary Herald.

“The dividend is put in place because of the business philosophy of the company,” Wright said. “When there’s a short-term down spike people question if you should cut the dividend, but if we put our heads down and deliver on our program then the likelihood is that in the future we can possibly increase the dividend.”  Read more: http://www.calgaryherald.com

(4) The business model, about which Wright speaks, makes sense to me.  It is true that initial funds up front for drilling result in debt at the beginning (Petrobakken is still a young company), and it is true that the production rate drop off is rapid in the first few months, but it is also true that the net-back (profit after expenses) for each well is very high and that the first few months of production pay for all the drilling expenses; then the wells continue to produce at a low rate for many years, providing a continuous flow of cash as a return on investment.

(5) Enhanced Oil Recovery promises to make it possible to extract as much as 20% higher oil than suggested by the current method of calculating reserves.  Devon Shire writes:

For example Canadian producer Petrobakken (PBKEF.PK) has reserves booked assuming a 5% recovery in its Bakken play, but believes that eventual recoveries will be 25%. I’d say Petrobakken might be exaggerating if it weren’t for the fact that its nearest rival Crescent Point Energy (CSCTF.PK) is suggesting recoveries will be 30%.

(6) PBN has non-core land assets that it could sell if it runs into cash flow problems.

(7) PBN now has a very low share price to book value ratio 0.4.  TD Waterhouse lists book price at $17.43.  In the end, a company that has excellent cash flow, increasing production, and high book value, will continue to add value to shareholders.  (Book value equals assets [land leases, equipment, infrastructure, buildings, cash on hand] minus liabilities [bank debt, convertible debentures]).  I stick to the principle of value investing as taught by Benjamin Graham in his book The intelligent investor.  If you can buy a company at book value, you are getting the future profits of the company for nothing.  If you pay less than book value, unless the company is losing money, you are getting a percentage of the assets for nothing at all.

My plan is to continue selling put options on PBN while there is weakness in the share price.  I’ve lost a lot of money on PBG/PBN already, but my experience in oil investing tells me to be patient, hold on, and become greedy when this kind of market madness sets in.   I can’t be sure that tomorrow won’t be the apocalypse, or worse, that the bottom will fall out of oil prices.  But it is a risk I think is worth taking.

Disclosure:  I am long PBG, PBN, and getting longer

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Another Canadian explanation of international monetary policy

The dollar is back by the United States government, while gold isn’t backed by anything, and therefore it is a more comfortable investment, according to this very pretty Canadian reporter:

Hat tip Zero Hedge

Actually, the US dollar is backed by the balance sheet of the Federal Reserve bank. See this post for another explanation of international monetary policy.

A Canadian explanation of global monetary policy

One of my kitties decided to stay out all night, and consequently I had trouble sleeping and found myself wide awake in the wee hours of the AM.  So I turned to Market Watch and Bloomberg News to see the latest.  First I turn to John Markman of Market Watch who claims that Timothy (I-forgot-that-I-had-to-pay-taxes) Geitner has cooked up a scheme that will save Europe (Geithner’s plus-sized euro bailout is stealth QE3).  :

The plan, cooked up by U.S. Treasury Secretary Tim Geithner, is to persuade European leaders to vastly expand the size of the emergency bailout fund known as the EFSF, or European Financial Stability Facility. His proposal, and I’m not making this up, would use leverage — i.e., borrowing — to increase the size of the already borrowed money in the fund by up to 10x. … snip

This is a little hard to believe, but it’s the truth. The funds from euro-zone countries in the EFSF have already been borrowed. And now the plan espoused by Geithner is to use that money as collateral to borrow as much as ten times more. The guy does not get enough credit for his evil genius.

Where is Geitner going to get this money?  Apparently, if I understand correctly, from the Federal Reserve Bank.  So Bloomberg says (Euro Crisis Makes Fed Lender of Only Resort),

The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide three-month dollar loans to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its counterparty.

So let’s get this straight:  The Federal Reserve will lend money to the Europeans.  This money will come from where?  It will become a new line on Fed balance sheet and will thus increase the adjusted money base.  This has become known as quantitative easing.  The money won’t be printed, and so nobody will see wheel barrows cash in the market places of Europe as they did in the Weimar Republic.  No, it will just be line in a balance book, electronically created from nothing at all (see Niall Ferguson, The Ascent of Money, 30-31, quoted in this post).

Now the best explanation of global monetary policy is in Corner Gas, season 3, episode 1, which is actually an allegory of banking in our times:  Oscar has made some bad bets in his stock picking game with Hank, who is beating him hands down.  They each started with $10,000 of fictional money, but Oscar’s picks have gone South.  But he’s seen the news about Ark Research’s insider trading, and he believes that knowledge will help him defeat Hank.  He decides to bet big on Ark Research, but he is in desperate need of liquidity.  So Oscar (a.k.a., the European banks) goes to his son Brent (i.e., the Federal Reserve Bank) and asks for $10,000 from his fictional money tree.  Brent says, Why can’t you do it yourself?  Did a fictional hooligan steal your make-believe ladder?  No, Oscar says, that would be against the rules.  Without rules nothing makes sense, he claims.  With rules, this makes no sense, Brent responds.  The monetary policy part of the clip begins at 0:39.  (@7:08 Oscar explains that he lost all the money and he can’t pay Brent back, and that is exactly how the loan to Europe is gonna go down).

I am victim II: A dialogue with Steve (a progressive Christian)

Craig Carter has written an interesting post entitled, “Secular Politics Infiltrating the Church: Hell’s Scheme to Bring Down Evangelicalism.”  There I’ve entered into a rather lengthy discussion with a self-proclaimed progressive who apparently believes himself to be Christian.  I reproduce here my comments and his responses.  I think it demonstrates that while progressives claim to care about people, they really despise people and are more concerned about re-engineering society to make it more equal–who cares who dies or suffers along the way, just so long as the rich can no longer parasitically leech off of others.  I responded first to his manner in which he responds to Craig Carter and Gordon (another correspondent), while mercilessly libelling the Tea Party.  Later, I explained how progressive, with their need to enlarge the state, had forced me to renounce my US citizenship, resulting in my suffering the loss of my birth right.  The reason that I insist on telling my story about how I’ve suffered is that I still can.  Those whom the progressives around the world have murdered can no longer tell their story.

Peter W. Dunn said…

That’s amazing Steve. You praise Craig and Gordon for civil tone of their responses to you, and then insult the Tea Party, libelling them as liars. Wow. An entire movement of people who want smaller government libelled as liars. You called Ron Paul demonic.

I think you should read my blog Steve: The Righteous Investor. You could start with this:  Worship the invisible God or our modern Idols:  which? 

You wrote:

“Progressives are not trying to replace a deity through gov’t, as you suggest, but progressives do not believe in a theocracy. We believe that ended with Jesus. The gov’t should meet the needs of all people, not just those who are wealthy or favoured by majority status.”

Well with these lines you have proved Craig Carter’s main point in the post. Because a god or an idol is what we have faith in to meet all our needs. You suggest that it is government. I suggest that Jesus is still alive and that it didn’t end with Jesus but he still lives in our hearts by the Holy Spirit. I’m not advocating theocracy–like the progressives who believe in big government that meets all our needs–I believe in small government that doesn’t suck up all the oxygen in the room and thus allows other institutions, like the family and the church, to breath a little too. But you advocate government as panacea and that ultimately is evil.

The socialists, of course, reject God as Jehoveh Jireh, because they believe in government-jireh, which provides everything we need. Who needs faith in a God who strictly prohibits in his Ten Continue reading

The best of all worlds: Candide’s Pangloss now working at Harvard University

In a book entitled, The Better Angels of our Nature, Harvard Professor Pangloss (Steven Pinker) says we are living in a more humane world today (see his article “Violence Vanquished“).

Well, I beg to differ.  He argues that violent death is less frequent than in previous periods in human history, and that the number of people who die peaceably in their sleep all over the world is at a higher percentage than ever before. True, because he’s only counting those who manage to make it out of their mothers’ wombs without first suffering a violent genocidal demise.  That’s only 4 out of 5 people.  So stay out of your mother’s womb.  It is a game of Russian Roulette (I prefer my chances with six shooter).  But also, we are now on the verge of war breaking out all over the globe (starting with Egypt, Libya, Yemen, etc.) caused by economic instability.  Apparently, the Christian Century published similar drivel, just before the outbreak of World War I.  Today, with global instability caused by monetary policy, the doctrine of Total Depravity is gaining traction.

Pangloss pictured right: click on picture to watch video at Market Watch