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.
I wrote to fellow blogger Kevin Graham the following warning after his repeated insistence that Wells Fargo is very safe and cheap:
Kevin: Are you aware of the consequence of the FATCA legislation and how it will affect investments in the United States? As a Canadian you can easily protect yourself from these consequences by pulling your investments out of the United States. I am involved in a group blog, the Isaac Brock Society, which is dealing with the questions of US persons abroad and the attempt of the United States to crack down on alleged tax evaders living abroad, including Canada.
I say this because you promote Wells Fargo, and not a few other US equities as “safe”. I am not sure that anything in the United States can be deemed “safe” and I recommend all investors to get out before the meltdown of the economy there. The other issue of course, is that the United States debt has no surpassed 100% of GDP. This seems to me to be a reason to be extremely cautious.
Kevin and I had a good time going back and forth over Petrobakken last year, when PBN hit its nadir. I was the bull; he was bear, even when PBN was at $6.50; Petrobakken achieved its year end exit production guidance and thus is on its way to a full recovery (which I think will be above $24). It didn’t hurt that Sinopec bought Daylight Energy, a company which had a similar debt issues to Petrobakken, but Daylight was arguably less attractive because it was more weighted towards natural gas than Petrobakken, but it did give us an opportunity to see what an outside buyer would pay for a mature intermediate oil and gas company, and it was double the then-current market price of Daylight. I took tender for my shares of Daylight and I am happy to say that I have, as of today, received into my brokerage accounts.
Unfortunately, Kevin’s recommends US bank after US bank. But he is apparently unaware of FATCA and the likely damage that it will do as a result of the exodus of foreign investment in the United States. Furthermore, I consider American banks black boxes. Who can possibly know what they are worth when they have so many derivative contracts that nobody understands? I consider the banks bad risk since the time that I learned that many of them (e.g., Scotiabank) have large short positions in gold through their sale of unallocated gold certificates.
One might ask why I bother checking Kevin’s blog. Well, I like reading some blogs that look at the world in a totally different way than I do. I also like to challenge them. Then, if they can muster cogent responses, it makes me think about my position. I can’t say that Kevin has ever succeed in convincing me of anything though. Each time that he talks about a company being safe (like Sears), I get the urge to add to my Spam collection.
My Spam collection
A few months ago I wrote a post critical of the hardline that the SEC took against Jonathan Lebed for so-called “pump & dump”. Lebed was a 15 years old at the time, and he was promoting penny stocks that he liked using bulletin boards and the like. It turned into a pretty lucrative trade for him, but the SEC made him pay a huge fine. I said that it was not right for them to go after some kid, when the people on Wall Street do this sort of thing all the time. Today, I think I found an example with one of the securities that I trade, Petrobakken.
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.
Today we learn that Statoil has offered 4.4 billion for Brigham Exploration, a company with holdings in the US Bakken. Using a number of interesting methods of comparing the Brigham Exploration with Petrobakken, Devon Shire concludes that Petrobakken could be worth as much as 300% of its current market price (at close on Oct 17, $8). This kind of comparison is very interesting, because, as I reminded readers in a previous post about Petrobakken, the true value of an junior or intermediate oil company isn’t so much its market capital, but by how much an industry insider such as Sinopec or Statoil is willing to pay. Devon Shire writes:
I don’t know exactly what Petrobakken is worth. But common sense tells me that an acquirer would be willing to pay a lot more than the current share price.
Petrobakken is just like Brigham. They are both companies that have years and years of drilling locations ahead of them and both companies sit on vast amounts of oil. That is why the multiples of flowing barrel of production and EBITA being paid for Brigham are so high.
You can’t value these companies using the same approach as you do for a conventional oil and gas producer. Much of the value is in the huge land positions that these companies have in unconventional resource plays. And much of that doesn’t show up in proved reserves because most of the undeveloped acreage isn’t booked as proved reserves.
It isn’t just Petrobakken that is massively undervalued right now. The entire sector in Canada is. Pick an unconventional producer and I almost guarantee it is trading at 50% or less than what an acquirer would pay.
All it takes is some common sense to see it. And some patience to wait for Mr. Market to figure it out.
See also: What does the sale of Daylight Energy tell us about the value of Petrobakken?