Petrobank

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.

Petrobakken manipulation: who is going to pay the fine this time SEC?

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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.

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Reflexions on Petrobakken (Updated)

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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

Bernanke the almighty and What are oil stocks worth anyway?

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Andrew at City of God has posted that the Watcher called into question Sue Richard’s calling the Silver Surfer all powerful:  “‘all-powerful? There is only one who deserves that name! And his only weapon… is love’ (Fantastic Four #72; Mar. 1968).”  Well for us investors, we worship at the feet of one and only one, his high and mightiness, Benjamin Bernanke, the chairman of the Federal Reserve Bank.  He is the one who determines what our assets are worth and he wields a weapon called “QE” and another called interest rates  with which he increases our power, our net worth, and we become mighty warriors of investing–but when he refrains from wielding them, suddenly we are all grovelling in the dirt like worms eating skubala (a.k.a., the margin call).

So I wrote to my good friend Mich at Beating the Index, who is fretting about running out of powder for his battle on the investment front:

Bernanke is the first cause of everything in the market today. He is exercising his omnipotent power as head of the Federal chair to influence risk appetite. Well, there will be either more monetization soon or watch hundreds of thousands of government workers in Washington not get their pay cheques and be sent home crying. My Schadenfreude would be so high at that point, it would almost be worth a 50% cut in my portfolio to see it. But it ain’t never gonna happen! Believe me, by August or September, the pols in Washington are going to lose nerve and there will be new debt ceiling (and QE3), based upon a compromise between the left-wing republicans and the democrats in the House.

Meanwhile, fear is palpable.  The companies  in which I am invested have increased their asset values through the development of oil fields but their share prices are way down because the lack of QE3 has diminished risk appetite.  People are rightly afraid to be caught with their margin pants down, like what happened to silver investors when the margin requirements were magically increased.

Devon Shire chides Petrobank (last $14.30)/Petrobakken (last $13.63) for not having a share buyback at these low prices, which puts their market capital at serious multiples below the Net Present Value.  Shire wants them to reward shareholders with a buyback of shares, but of course the management spent that cash on PBN shares starting at $21 and who knew that the price would plummet to these levels? These prices  are not only at multiples below NPV but well below book value (=shareholder’s equity).  I wrote to Mr. Shire the following response:

Net Present Value for other junior and intermediate companies is also currently at extremely high ratios to market value. Midway Energy is reporting NPV10 of 1.7 billion while its market capital is 274.9 million.

Some are angry with Petrobakken for continuing what they consider to be an ill-advised dividend program. Evidently, the buy back of shares is an equivalent use of cash as a dividend–I suppose that the real need is to spend money on developing their resources in order to deliver growth. The sad part is that PBN started the repurchase program at $21 while the price was so high vis-a-vis the current price.

At some point either you and I are going to be considered really stupid for thinking we had found value in the Canadian oil sector, or there is going to be a major correction drastically decreasing the NPV/market capital ratio.

Yet Mich warned me about taking the NPV10 that Midway had presented as a serious indicator of their value and I reproduce here our dialogue:

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Petrobank’s THAI presentation

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Please click on the above picture to watch the video presentation of Canadian oil company Petrobank.

THAI seems like a pretty straight forward method for extracting many billions of barrels of heavy oil from underground reservoirs, while at the same time making it into to a lighter, more useful, grade of oil.  Perhaps projects like this make oil an energy not just of the present but of the future by greatly increasing the world’s known reserves.  Canada is second only to Saudi Arabia in oil reserves.

Disclosure: I have a position in Petrobank.