Crescent Point Energy Corp.

What does Petrobakken’s sale of 7% of their Bakken business unit imply about the value of the remaining Bakken lands?

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See also:
What does the sale of Daylight Energy tell us about the value of Petrobakken?
What does the sale of Brigham Exploration tells us about the value of Petrobakken?
Reflexions on Petrobakken (Updated)

Petrobakken has sold 7% of their Bakken business unit to Crescent Point for $427 million.  Their press release says:

The Bakken Business Unit will continue to represent a significant portion of our corporate asset base as this sale represents only 7% of the Business Unit’s land holdings and approximately 12% of its production. Assuming successful completion of this Transaction, our average working interest in our remaining Bakken Business Unit lands will increase from 82% to 86% and we will continue to have over 700 net drilling locations in the Business Unit, representing approximately 10 years of drilling inventory.

In the past two years, Crescent Point has received market love. Its managers are hailed as brilliant and it is consistently able to raise money in the form of new issues.  Petrobakken and Petrobank, however, have struggled to get the same kind of love.  As a result, Petrobakken/Petrobank has been the better deal for value investors–whereas there seems to be a premium on the shares of CPG compared to industry peers, Petrobakken is still selling at a deep discount to value.

The implied value of Petrobakken’s Bakken Unit

If 7% of the Bakken Business Unit sells for $427 million, the implied value of the remaining unit is:  $5.673 billion (427 = .07b; b=6,100 whole bakken unit; remaining Bakken = 6,100-427= 5,673).   Petrobakken’s total market capital is currently $2.5 billion.  This means that the current market price of Petrobakken sells at a 50% discount to the Bakken business unit alone.  Don’t take my word for it.  Take the value that the industry’s smartest managers, Crescent Point, have just given to the 7% that they bought.  Crescent Point has just done a great favor to Petrobakken by showing that its stock is worth closer to $30 per share (not counting remaining debt and the value of its other holdings, including its Cardium, which I would argue is much more than zero dollars per share).

Disclosure:  I am long PBN, PBG and CPG.

Focus on what is real not what is safe

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Monty Pelerin offers some investment advice and then asks his readers what they would suggest. I responded with the following comment:

Gold mining companies may be good in the sense that their assets (NAV–Net Asset Value) are largely trapped under ground and brought to the surface at a slow rate and sold for profit; thus they will still be recovering value from the ground when money has collapsed and gold is needed as a currency. I think the same is true of Canadian oil companies, which have large stores of oil and gas in the ground (i.e., NPV–Net Potential Value)–the Cardium and Swan Hills are largely, e.g., are known quantities exploited by vertical drilling and are now offer new yield through new technologies, i.e., horizontal drilling and multi-fracking. Billions of barrels remain in the ground, and EOR (Enhanced Oil Recovery) methods, such as the injection of natural gas, that companies like Petrobakken (see this post) and Crescent Point are beginning to employ promises to produce as much as 25% more recoverable oil from the fields–this means that these companies could increase their NAV by as much as 5 times, since their current NAV is based on 5% recoverable oil. The US has a lot of oil too, but the Canadian regulatory environment remains for now a far more favourable than in the US. Yet this remains high risk, and my portfolio which consists most of these oil companies and few miners is suffering YTD.

After your last post by Ann Barnhardt, and the news coming from Gerald Celente about how his cash was stolen from his brokerage account, one wonders if any brokerage account is safe any more.

Thus, the operative word in all this is risk. Nothing is safe. Perhaps the best thing is to focus on what is “real” as opposed to what is “safe”. Fiat money is not real, for our estimation of all that is denominated in nominal currency is actually a reification–the assigning of concrete value to an abstraction. What is real? Physical gold & silver, wine kits (see Wine as Currency), spam, beans, unused toilet paper, used aluminium beverage cans. What is reified? Bonds, derivatives, currencies, the value of gold in terms of fiat currency, etc. I have a canned spam collection, Monty Python not withstanding–mind you, I like spam. It has a long shelf life and is good food during times of crisis–that’s why my Korean family from Hawaii used to eat a lot of it–it could survive the sea journey from the mainland and was a staple during WWII.

A HELOC Strategy: How to use a home equity line of credit to create investment income

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Jonathan Chevreau of the National Post is one of the best financial columnists in Canada and I admire him because of the practical information that he provides to Canadians wanting to know how to invest their retirements savings.  He now has a column about HELOCs — home equity lines of credit:  Be wary of home-equity lines of credit.  Chevreau writes:

Veteran mortgage broker Michael Maguire has seen too many clients with balances at or close to the limit. Lenders portray HELOCs as assets, but they are debt products, making them potentially dangerous for those not disciplined in handling money. “Most seem to find it too easy to borrow and end up living at their limit,” says Mr. Maguire, of London, Ont.-based Mortgage Wise Financial.

I agree.  One should never use a HELOC to create consumer debt or bad debt (see my post, “Is debt sin?“).  But it is an excellent product for the small business owner.  I know a local businessman  in my neighborhood who bought the commercial unit in which he has his store with a HELOC.  He has a low interest rate (it was prime) and he can pay it off or draw from it depending on the cash flow of his business.  It is has been an extremely useful debt product for his business.

When the credit crisis hit in earnest in the Fall of 2008, we opened up a line of credit, and it has been a major boost to our investments.  I was able to pick up some serious value on the TSX in stocks whose distributions were many percentage points above the interest rate.  This helped me to formulate a strategy for investing.  As a conservative investor, I try to keep my line of credit low, at no more than about one-fifth of the credit limit so that  if the market goes down, there is still sufficient credit to “average down” by picking up larger positions of the same stocks as the prices plummet during a bear market.  Thanks to the HELOC, I’ve now been able to establish a steady income based on these distribution paying stocks (mostly in the Canadian oil and gas sector).

There are some serious risks:  (1) Most of these distribution paying stocks began to lower their payouts almost the moment I started using the HELOC because of the drop in commodity prices.  But then their share prices plummeted too as direct result.  Consequently, I was able to pick up even more shares at unbelievably low prices and to keep the income well above the interest payments.   (2) The interest rates could climb.  But from the time I started this strategy until today, interest rates have gone down and stayed at historical lows.  In anticipation of interest rate hikes, I regularly pay down the line of credit as fast as possible.  When it’s at zero for a while, then my risk appetite increases again.  (3) The share prices of my stocks could plummet.  But by using only a fraction of the HELOC, I pick up more positions as the market goes down.  So when the prices went down it actually helped me even though it created initial unrealized losses.   Eventually, from March 2009 until today, we’ve been in a relentless bull market–so that with a couple of exceptions, everything has gone up, up, up.  (4) Since your home is the collateral for this debt product, one has to be restrained in using it for fear of becoming homeless as result of bankruptcy.  This is another reason for using only a fraction of the credit limit.  (5) My stock portfolio is not diversified.  It is therefore highly susceptible to the volatility in the commodities market.  This choice is made because some Canadian equities in the oil and gas sector pay well, especially in the income trust sector.  Many of these will convert to dividend paying stocks in January 2011 because of rule changes and this may result in a lower yield.

Since this strategy aims at establishing an income, I’ve only done a very minimal amount of trading (i.e., “buy low, sell high”).  It is therefore a strategy of investing which is much closer to what is called “value investing” than “day trading”.  Here is a list of companies that I’ve established long positions:  erf.un, cpg, nae.un, pmt.un, day.un, bnp.un.  Those which are weighted heavily in natural gas have done less well than those which concentrate on oil.  But fortunately, the gas-weighted companies like pmt.un and erf.un have hedges that have made it possible for them to maintain their distributions at a high rate in proportion to their share price.

If there is a lesson in this for those who aspire to be righteous investors, it is to first establish equity:  the bank will not lend at the lowest interests rate without the security of some form of collateral, which usually means home equity.  This means for many years making the sacrifice of not spending money on every whim in order to pay down the house mortgage as soon as possible.

Here are some numbers to give an example of how the above strategy can work:

Using a HELOC, $31,200 spent on CPG (TSX) would buy 800 shares $39.00 per share.  The interest in the first month at 3.25% (current TD Canada Trust HELOC rate) would be $84.50; the dividend from 800 shares of CPG at .23 per share is $184:  Thus, the net in the first month is $99.50 or .32 % of the total capital put at risk.