What does the sale of Daylight Energy tell us about the value of Petrobakken?

On the close of market on Friday, Daylight Energy had a market capital of CDN $976.9 million and a book value (according to TD Waterhouse website) of $6.06.  With the proper approvals, Sinopec will buy it for CDN $ 2,200 million which comes to CDN $10.08 per share.

Daylight Energy is a company that has similar assets, such as a large undeveloped Cardium base, to Petrobakken.   The difference is that Daylight has greater natural gas weighting than Petrobakken, and given the current commodity prices, Petrobakken should probably be more valuable.  But the thing that makes Daylight most like Petrobakken is the current debt load.  According to Bloomberg:

Investors feared Daylight’s relatively high debt load compared to peers, combined with a fall in oil prices, would crimp earnings, Geoff Ready, an analyst with Haywood Securities LLC in Toronto, said in a telephone interview. Daylight has total outstanding debt of C$872.5 million, according to data compiled by Bloomberg.

In this respect, Daylight is very much like Petrobakken–the market has shunned it for the same reason.  While both companies pay a great dividend, have great cash flow and sit on large, very valuable land bases, Mr. Market has spurned them and thrown them under the bus.  This is what makes them a great value investment.  I have written about book value in previous posts (e.g., here), that the price of a private sale of a company which has positive cash will never fall short of the book value of the company.  Unfortunately, the price for Daylight was only a small premium above book–just about $4 per share.  This is the true value of the company, not what Mr. Market is willing to pay but what industry insiders (such as Sinopec, a large Chinese Petroleum company), who would buy the business outright, would pay.

Therefore, I would like to assign a market value to PBN based on the same metrics (in CDN $$; book value from the TD Waterhouse website):

Daylight: book value $6.06; sale price 2.2 billion or $10.08 per share; sale price as a percent of book = 166%

Petrobakken: book value $17.43;  $28-29 per share (i.e., 166% above book price)

Now ultimately we have in this offer from Sinopec a fairer evaluation of the value of a Canadian dividend paying intermediate oil company than what Mr. Market is providing.  I would think that if you want to get in on Petrobakken or any other CDN intermediate oil company, it may be too late to do so based on the prices that we’ve seen in the last two weeks.  I’m holding my ground.

Furthermore, I would like to say that in the global monetary crisis that politicians and central banks will resort to currency devaluation to solve their problems–i.e., they will inject liquidity by recapitalizing banks, buying up troubled assets, etc.  The Chinese holders of debt are now in search for quality assets based on resources, and they are getting a steal with this offer to Daylight.  Personally, I am glad for the offer.  But as a shareholder of Daylight Energy, I will probably vote against the deal (provided that I continue to hold until the vote).

Nota Bene postlude:  Finally, I would add that this sale seems to repudiate the method of evaluating Petrobakken using only proven reserves (see herehere and here).  The Chinese experts have decided that the land is worth something–a lot more along the lines of the industry experts in Canada such as the CEOs of Petrobakken and Daylight Energy.    I would say that this sale makes some of us, who focus on the land base and the oil in the ground and such metrics as low book/price, look a lot smarter than some would allow.  A certain blogger offered some pretty self-confident and disparaging comments about how I was gonna lose money on Petrobakken and how I didn’t know what the hell I was doing.  To be sure, I’ve already lost a ton of money, but $25 is my top price for the company ($27 put minus) as I have averaged down from there (my average price is much lower).  I’ll continue to collect a nice dividend on all my shares until a buyer takes it out for $28+ or the market realizes what it’s really worth.

Chinese offer $10.08 per share for Daylight Energy

Subject to approvals, China’s Sinopec is buying Daylight Energy (DAY.TO) for $10.08, which closed at $4.59 CDN Friday. Here is another example, like Petrobakken, where Mr. Market doesn’t know what something is worth, but another industry giant does.  I feel sorry for those who bought at $11.74, the 52 week high. You win some and you lose some.

My friend Mich won big on this one.  He bought near the market close on Friday 1000 shares–that is a one day return of over 100%!  My returns are far more subdued.  I will make 8.8% return on capital at risk on this deal.  It helps me, because my current position was in the BIG RED.

But I’m not that happy, because this is Canada’s future, and I don’t think we should sell our assets to foreigners at enterprise value but at a significant premium.  But hey, it will bring capital into Canada and it will create jobs, and so I am happy about the short term help it will bring.

While this is 2.2 billion dollars and it seems like a lot of money, it fits into the larger meta-narrative:  The international trading scheme, whereby US consumers buy goods from creditor nations which in turn  lend the money back to the US government,  is unravelling.  This asset purchase is a rebuke of the US dollar, just as the dumping of $56 billion in treasury notes by foreign creditors.  We should expect more of this and as suggested by Zero Hedge, it is perhaps the beginning of the end of the US dollar:

Of course, there is a far simpler explanation [for the dump of 56 billion in US treasury debt]: the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity (although not with the element of surprise – China has made it abundantly clear it will sell its Treasury holdings, the only question is when), has finally arrived.

Mayor of London barred entry into the United States on his British Passport

In 2006, US immigration officials refused Boris Johnson, now mayor of London, entry into the United States on his British passport, saying that because he was born in the United States of America, they required that he travel on a US Passport into the US or have proof that he was no longer an American.  This proof is probably the Certificate of Loss of Nationality (CLN). Johnson writes:

So I circumnavigated America. I flew via Madrid, managing to beat the rest of my family to Mexico by 45 minutes; and yet I still seethe. It’s not just the stupidity of the rule that gets me. It’s the arrogance. What other country insists that because you can be one of its nationals, then you must be one of its nationals? Imagine if we told all British-born Americans that they could not arrive in this country except by use of a British passport. I haven’t seen anything so insanely possessive since the negotiations on the Common Fisheries Policy, when the Irish used to claim that the cod stocks of the Atlantic were still Irish in their fishy souls, even though they had long since emigrated to Portuguese waters.

As far as I can interpret the psychology of the rule, which has only been applied since 9/11, it is part of America’s new them-and-us mentality, the Manichaean division of the world into Americans and non-Americans, obliterating any category in between. Listen, buddy, the Americans seem to be saying. You got a right to be American? Then you do us the courtesy of travelling on the world’s number one passport when you come here. What you got to be ashamed of, boy?

I can tell you this:  the American tourist industry and airlines will lose a lot of business if a lot of accidental Americans have to circumnavigate the US.  This is dumb, dumber, and dumbest.  I too seethe.