PWE - Penn West Petroleum

[bizaro86]

Maybe this should eventually belong to a separate thread.

Disclosure: I understand the 'torque' embedded in new PennWest and the potential reward but I'm not sophisticated enough to understand and/or manage the risk involved.

Disclosure: There may be a way to re-enter the space at some point with a basket approach or something and (thanks to KJP) have looked at royalties tied to mineral rights in the US and I find the following interesting:

...

I think the altius model of project generation for royalties combined with a value investing asset buying bent could be hugely effective in Canada's oil patch. Maybe someday I'll raise some money and do it myself, as so far I haven't found anyone doing that yet that I feel comfortable investing with.

The royalty dynamics seem to be different in Canada. I've tried to look at the potential ramifications tied to vanilla royalties or overriding royalties if the operating firms run into distress. Have you looked at PSK and FRU?

You come across as a competent and straight-shooter kind of person and would appreciate if, over the next few years, you take to time to share your thoughts and/or progress on this question.

 

Sorry for the delay in replying, had a death in the family that slowed me down. I appreciate the kind words, and will share some thoughts. I cheerfully admit to not having this completely fleshed out myself, and I'm probably both too busy and not rich enough to open my own royalty shop at present. Maybe those conditions will both change in the future...

 

Anyway, from a finance point of view, I think royalties are basically just a higher part of the capital structure. Like anything else, you do a DCF (or short hand with a multiple) and probably use a lower cap rate because of the better position in the capital structure.

 

However, I think oil and gas royalties are a bit different than a royalty on a widget factory, because oil and gas royalties come attached to oil and gas assets. If you own the underlying minerals, when some terrible operator (PWE et al) chooses to over capitalize their operations you benefit. I've looked at many development plans where the marginal return on the last wells in a section of land was terrible. But management drilled them because it increased production in the short term even though it was likely value destructive. But those extra wells are value accretive for a royalty co, because they get their share of the production while not contributing to the capital in any way.

 

There are all sorts of ways to over capitalize an oil/gas field (too many gathering pipelines, too many wells, too much compression, uneconomic secondary/tertiary recovery, putting too much chemical in a polymer flood, etc). Operators do them all because the operating team wants to meet their production target (==bonuses). Its easier to over capitalize an existing field than find a new one, and most people have no imagination.

 

The other big advantage to a royalty co is that technological advances and inflation both increase the percentage of the resource that can be extracted profitably from a given field. If you buy a royalty asset and the reserve report says 10% recovery, but pricing and technology means recovery is actualy 25%, you just increased your value by 150%. (Undiscounted, but still good). By contrast, the operator needs to pay for all that fancy new technology, so the extra barrels probably increase their economics by much less. They will extract them because now marginal revenue > marginal cost, but going from 10% recovery to 25% recovery doesn't give nearly the same economic boost.

 

This is even more pronounced in cases where current technology/price says a resource shouldnt be extracted. In that case the mineral rights are often cheap, and a royalty co can benefit greatly when the technology/cost curve makes those assets developable. This is the type of asset I would buy for project generation purposes - something where the resource is known to be there but isn't economically extractable at present. Horn river is a good example. Lots of dry gas that isn't economic, and the land is cheap right now.

 

On the existing public companies, I own FRU but not PSK. There are only 2 sets of significant private minerals in W. Canada - those that the Hudsons Bay kept when they sold the land to the Dominion of Canada, and those the CPR got when they built the railroad. FRU has a subset of the HBC minerals, and has moved to financing with GORs. I like GORs less, because you have operator solvency risk (somewhat depending on deal structure). I feel that is offset by FRU management quality, which I deem as excellent. Everyone I know at FRU is diligent and competent, and they have a great reputation for finding mistakes in the payments others make. I don't own PSK, which has half of the CPR minerals. I like the half Cenovus sold to the Ontario Teachers better, and PSK has been historically too expensive for my taste. They've gotten a lot cheaper recently however, so I may look further there.

 

If I was running my own shop I'd do two things-

 

1) GOR financing for cashflow. This would require a lower cost of capital than the juniors, which wouldn't be hard right now I don't think.

 

2) buy (or lease, more accurately) large chunks of undeveloped land with known hydrocarbon accumulations. There is tons of this out there at low prices right now, because the market has decided the cycle will never turn. Farm the land out for drilling and retain royalties.

 

Could also try and pick up the odd piece of freehold minerals, as there are a few privately owned pieces here and there.

 

While I own FRU, I don't trust them to generate new long term value. They are mostly owned an entirely run by the CN pension funds. They do a great job as administrators but I think their acquisitions are too finance oriented and not sufficiently oriented to future exploration upside. Basically, I think they are making participating loans vs oil and gas investments. That's ok, and they're trading cheaply, but I don't think they are getting enough free upside when they deploy capital. I suspect their go forward returns will be acceptable but not spectacular, which is perfectly ok given their current trading price but not likely to generate the 10x bagger discussed previously in the thread.

[muscleman]

I don't have any hope convincing any of you existing longs to give up on this. I just want to warn inexperienced investors to stay away from it.

Think about it this way. This thing has gone down 97% since SD posted. If the investment is so good, how likely is it to go down 97% before going back up? You guys all want to focus on avoiding permanent loss of capital. How likely is it that this thing goes back up 20 fold to get you back to break even? Even if this thing happens to work and you go back to break even after 5 years of distress, how willing are you to let your entire portfolio go down 97% and stay put? And we are just talking about breaking even, not even making any money.

[SharperDingaan]

We don't follow Yangarra, we own a chunk of Whitecap instead (also Cardium).

Our own view is that a consolidation in the Cardium is inevitable, and that it will be OBE that gets gobbled. But it is not going to happen until there is confidence that Alberta's egress problem has been resolved, buyers are going to have to pay up for the quality, and the currency will be primarily stock versus cash. OBE does well because it has the right assets in the right places; management just has to keep the company alive, and not bankrupt it.

 

The reality is that OBE is a 'special situation'.

OBE should have bankrupted a long time ago, but didn't - because they were able to pull off the Sask Viking sale. The remaining asset quality has been good enough to carry them through, but it came at the cost of 'legacy' drag. Ongoing 'legacy' obligations, poor management, legal and lease costs, pace of change - negative EPS. Going forward, much of this is now gone, but it has made comps meaningless. As OBE in each of 2019, 2018, 2017, 2016 was a very different company versus the year before, what is really being compared? As OBE's issues are very different to others in the Cardium, what is really being compared? Analyst's nightmare.

 

Ultimately we are betting on Alberta. Todays pipeline issues eventually get resolved.

If you just want Cardium exposure, there are safer alternatives, we hold Whitecap primarily for its management, and the dividend. But if your aim is aggressive wealth creation, from hopefully a once/lifetime opportunity, OBE really has to be near the top of the list - along with risk mitigation.

 

Looking back, we went into OBE far too early.

That said, it is highly doubtful that anyone could have predicted what would happen to Alberta's oil industry over the last few years. It has been bruising, but we've rolled with the punches, learnt how/when to do the right things, and are comfortable with our positions on Alberta's economy.

 

May we all do very well!

 

SD

 

 

 

[SharperDingaan]

I don't have any hope convincing any of you existing longs to give up on this. I just want to warn inexperienced investors to stay away from it.

Think about it this way. This thing has gone down 97% since SD posted. If the investment is so good, how likely is it to go down 97% before going back up? You guys all want to focus on avoiding permanent loss of capital. How likely is it that this thing goes back up 20 fold to get you back to break even? Even if this thing happens to work and you go back to break even after 5 years of distress, how willing are you to let your entire portfolio go down 97% and stay put? And we are just talking about breaking even, not even making any money.

 

You are welcome to your opinion.

However there have been ample warnings along the way, that OBE is not for the risk adverse, or inexperienced investor.

 

SD

 

 

 

 

 

[alertmeipp]

for OBE to give good return going forward, you will need

 

1) close to or above 60 oil price

2) tight differentials

3) good NG and NGL pricing.

4) banks continue to play balls and not cut its bank line further.

 

The return will be significant given its low market cap compared to EV but risk is REAL.

 

The WG wells coming online seems to be quite decent, they can lower debt with 60 oil.

 

Reserve and land worth nothing last couple years (no buyers), if sentiment changes, they can sell some land too to lower to debt ratio.

 

It's ugly pig that might fly still but only. But it's clearly not slam dunk and it's a bet that stars will finally align... I can see if go up 4 5x in months if things still aligning.

[SharperDingaan]

All very true

 

I expect that the tipping point will be when OBE comfortably exceeds the USD 1, NYSE listing requirement.

OBE will have become 'investable', and a PM could reasonably expect a double within 1-2 quarters.

Whether that actually happens .... is the mystery

 

May we all do well.

 

SD 

[heth247]

for OBE to give good return going forward, you will need

 

1) close to or above 60 oil price

2) tight differentials

3) good NG and NGL pricing.

4) banks continue to play balls and not cut its bank line further.

 

The return will be significant given its low market cap compared to EV but risk is REAL.

 

The WG wells coming online seems to be quite decent, they can lower debt with 60 oil.

 

Reserve and land worth nothing last couple years (no buyers), if sentiment changes, they can sell some land too to lower to debt ratio.

 

It's ugly pig that might fly still but only. But it's clearly not slam dunk and it's a bet that stars will finally align... I can see if go up 4 5x in months if things still aligning.

 

I think it would be more constructive for this board to discuss what could kill OBE from now on than keep repeating "this thing has gone down 97% in the past so it will not be a good investment going forward".  To me the latter sounds more like opportunity, but I agree that this investment has lots of hairs. Here are my thoughts on what can kill OBE:

 

1. Debt. They are 2.9X leveraged, not ideal but not terribly high either. If oil range bouncing between 55 and 60 for 2020, I think they should still be able to pay down debt to be at 2.5X or lower at 2020 year end. Their interest coverage is pretty good 4~5X. The only thing that makes me uncomfortable is that they are very close to the 3:1 covenant ratio. If oil price crash, they could easily go over again. However, their debt are mostly secured bank debt, no unsecured debt (who loan to own). Why would bank choose to foreclose them just because of exceeding the 3:1 covenant, given their good interest coverage? As a matter of fact, we have seen that banks were willing to relax it for 2019 when oil price went down to $40 at the end of 2018. So my feeling is that banks are likely to continue to play ball.

 

2. Oil price. They were willing to hedge for $50 oil price for 18 months. That suggests they feel they can still survive or break even at $50 oil. If oil drop down to $45, then yes that will hurt, but for how long can oil sustain at $45?  At current $60, they should be able to pay down debt significantly. Actually I am hoping oil could just stable at $60 without a spike to $70 that will bring back all the shale drilling.

 

3. More management mistakes. Hopefully they have learned from the mistake of bad hedges. And currently they are spending within FFO and paying down debt partially. And Lucas is the CEO now. What damage can he do? Will he do a equity raise of $100M at USD $1 to delever? That is a 120% dilution but I think buyer at current USD $0.67 will still make money.

 

4. Tight differentials. I don't know much about this, other than hoping Alberta gov has learned their lesson too and won't let the $30 differential happen again. What do you guys think?

 

5. NG and NGL pricing. Long term I am not optimistic about NG price, but since OBE is 70% oil so damage will be limited?

 

Any other big risk that I have missed and what are your thoughts?  Thanks.

 

 

[SharperDingaan]

Failure to act/FOMO. Lots of levers in play, any one of which has the potential to materially move the share price.

Obviously, if the stars start aligning ....

 

Never-ending SR. While the SR is in progress, OBE is obliged to only report the material minimum as/when required, insiders are not permitted to transact in the stock, and accounting is forced into overly conservative reporting. Improve investor communication, and good things follow.

 

Banking. The loans are primarily covenant versus reserve based, and mostly a FR credit line. Ongoing status quo will depend on the reserve report, plans to term the loans out, and the current regulatory/banking 'understanding'. BoC/OSFI/Fed/Alta will be leaning on syndicate members to work with the industry.

 

Marketing machine. There have been so many failures that it is suicide for an analyst to recommend OBE, hence no new funds flow into OBE. The machine cannot do its thing, until institutions are comfortable there is little risk of a NYSE delisting.

 

Iran/Aramco/Trump. A retaliation strike on Iranian facilities is a game-changer, and time is running out on Trump. Should oil prices temporarily spike, OBE is well positioned to use the opportunity to both rapidly and significantly reduce debt. If nothing happens, debt repayment is a slower process.

 

Pricing and management risk is inherent to all commodity stocks, not just OBE. Ultimately, it is a punt on tidal direction. If you think the tide is coming in ... FOMO moves to the top of the list.

 

SD

 

 

 

 

[Liberty]

 

I think it would be more constructive for this board to discuss what could kill OBE from now on than keep repeating "this thing has gone down 97% in the past so it will not be a good investment going forward".

 

I think that's naive. Someone who doesn't know much about markets and business might think that reversion to the mean works reliably for single companies, and that the more down something is, the more it's bound to go back up, but if you're a practitioner, you know that if a business has evaporated 99% of its market value in a few years, the overwhelming chances are that most of the coming things will be negative. You can speculate on it--I already posted about how volatile the equity stub is and how anything can happen in the short term--but I have a hard time seeing how you can invest in something when the commodity price could do anything and is out of control of management anyway and time is your enemy because ROIC is terrible or negative.

[muscleman]

for OBE to give good return going forward, you will need

 

1) close to or above 60 oil price

2) tight differentials

3) good NG and NGL pricing.

4) banks continue to play balls and not cut its bank line further.

 

The return will be significant given its low market cap compared to EV but risk is REAL.

 

The WG wells coming online seems to be quite decent, they can lower debt with 60 oil.

 

Reserve and land worth nothing last couple years (no buyers), if sentiment changes, they can sell some land too to lower to debt ratio.

 

It's ugly pig that might fly still but only. But it's clearly not slam dunk and it's a bet that stars will finally align... I can see if go up 4 5x in months if things still aligning.

 

I think it would be more constructive for this board to discuss what could kill OBE from now on than keep repeating "this thing has gone down 97% in the past so it will not be a good investment going forward".  To me the latter sounds more like opportunity, but I agree that this investment has lots of hairs. Here are my thoughts on what can kill OBE:

 

1. Debt. They are 2.9X leveraged, not ideal but not terribly high either. If oil range bouncing between 55 and 60 for 2020, I think they should still be able to pay down debt to be at 2.5X or lower at 2020 year end. Their interest coverage is pretty good 4~5X. The only thing that makes me uncomfortable is that they are very close to the 3:1 covenant ratio. If oil price crash, they could easily go over again. However, their debt are mostly secured bank debt, no unsecured debt (who loan to own). Why would bank choose to foreclose them just because of exceeding the 3:1 covenant, given their good interest coverage? As a matter of fact, we have seen that banks were willing to relax it for 2019 when oil price went down to $40 at the end of 2018. So my feeling is that banks are likely to continue to play ball.

 

2. Oil price. They were willing to hedge for $50 oil price for 18 months. That suggests they feel they can still survive or break even at $50 oil. If oil drop down to $45, then yes that will hurt, but for how long can oil sustain at $45?  At current $60, they should be able to pay down debt significantly. Actually I am hoping oil could just stable at $60 without a spike to $70 that will bring back all the shale drilling.

 

3. More management mistakes. Hopefully they have learned from the mistake of bad hedges. And currently they are spending within FFO and paying down debt partially. And Lucas is the CEO now. What damage can he do? Will he do a equity raise of $100M at USD $1 to delever? That is a 120% dilution but I think buyer at current USD $0.67 will still make money.

 

4. Tight differentials. I don't know much about this, other than hoping Alberta gov has learned their lesson too and won't let the $30 differential happen again. What do you guys think?

 

5. NG and NGL pricing. Long term I am not optimistic about NG price, but since OBE is 70% oil so damage will be limited?

 

Any other big risk that I have missed and what are your thoughts?  Thanks.

 

I'd like to invite you to participate in a ponzi schem where you can earn 100k a year. But in order to get the membership, you have to pay me 200k first. After that, from time to time, I may have to ask you to put up more money because too many people participated in this ponzi scheme and we ran out of our funds.

Our valuation should be based on 4-5 times multiple FFO (100k a year), so the membership is worth 400k but you are only paying 200k so that's a great deal.

Are you interested?  ;)

[roundball100]

@muscleman:  This seems like a sure-fire win!  And if I lose the first time, will you allow me to play again?  I understand from earlier in this thread that investing is very simple, like flipping a coin, and that you get a 50-50 chance of winning every time you flip (independent of the details of the investment opportunity at hand).  So, you will allow me to continue paying into this scheme again and again, throwing good money after bad, if I fail the first few times, or first few hundred times as the case may be?

[heth247]

 

I think that's naive. Someone who doesn't know much about markets and business might think that reversion to the mean works reliably for single companies, and that the more down something is, the more it's bound to go back up, but if you're a practitioner, you know that if a business has evaporated 99% of its market value in a few years, the overwhelming chances are that most of the coming things will be negative. You can speculate on it--I already posted about how volatile the equity stub is and how anything can happen in the short term--but I have a hard time seeing how you can invest in something when the commodity price could do anything and is out of control of management anyway and time is your enemy because ROIC is terrible or negative.

 

I appreciate the feedback. I agree that there is a high chance that the business won't recover in such cases. But it is the market cap, not their asset, that lost 99% value. Put the asset in another good operator, it could still generate good FCF. So I am willing to "speculate" here.  Regarding "commodity price could do anything", like Buffett said when he invested in OXY earlier this year, "you need a long term view on oil to feel comfortable investing in it".

[heth247]

I'd like to invite you to participate in a ponzi schem where you can earn 100k a year. But in order to get the membership, you have to pay me 200k first. After that, from time to time, I may have to ask you to put up more money because too many people participated in this ponzi scheme and we ran out of our funds.

Our valuation should be based on 4-5 times multiple FFO (100k a year), so the membership is worth 400k but you are only paying 200k so that's a great deal.

Are you interested?  ;)

 

By labeling OBE as a ponzi schem, I think you are making the assumption that

1) OBE owns bad asset, the economics of extracting the oil from their Cardium asset is the same bad as those never-profitable US shale operations.

2) Oil price will stay at $50 or below forever.

 

Can you explain what makes you so confident that these assumptions are valid? thanks.

 

 

[Liberty]

I appreciate the feedback. I agree that there is a high chance that the business won't recover in such cases. But it is the market cap, not their asset, that lost 99% value. Put the asset in another good operator, it could still generate good FCF. So I am willing to "speculate" here.  Like Buffett said when he invested in OXY earlier this year, "you need a long term view on oil to feel comfortable investing in it".

 

What's your edge in valuing those assets? Hasn't management changed at least once, maybe twice, in recent years? How much are the assets worth if oil goes down some more? Who's to say a new management might not be even worse?

 

Speculation is the right word. Someone could buy it, or it could keep burning cash until the equity is worthless... and then someone buys it and the equity holders don't get a penny.

[heth247]

What's your edge in valuing those assets? Hasn't management changed at least once, maybe twice, in recent years? How much are the assets worth if oil goes down some more?

 

I don't have an edge in valuing those assets. But their recent well results in Cardium looks decent. The assets probably won't be worth much if you assume long term oil price of $50 or lower.

 

Speculation is the right word. Someone could buy it, or it could keep burning cash until the equity is worthless... and then someone buys it and the equity holders don't get a penny.

 

I guess that is what happened with Pen Growth, in which share holders got 5 pennies. But even we assume the valuation of Pen Growth, $33,000 boe/d, we could fetch about $3/share for OBE.  Pen Growth has much higher leverage (6X?), OBE is not nearly as distressed as Pen Growth. So OBE does not have to sell now. They can wait for the tide to turn. Of course, a big risk is management could keep destroying values during the waiting. Thus we need to closely monitor it.

[muscleman]

I'd like to invite you to participate in a ponzi schem where you can earn 100k a year. But in order to get the membership, you have to pay me 200k first. After that, from time to time, I may have to ask you to put up more money because too many people participated in this ponzi scheme and we ran out of our funds.

Our valuation should be based on 4-5 times multiple FFO (100k a year), so the membership is worth 400k but you are only paying 200k so that's a great deal.

Are you interested?  ;)

 

By labeling OBE as a ponzi schem, I think you are making the assumption that

1) OBE owns bad asset, the economics of extracting the oil from their Cardium asset is the same bad as those never-profitable US shale operations.

2) Oil price will stay at $50 or below forever.

 

Can you explain what makes you so confident that these assumptions are valid? thanks.

 

There is a saying that in the short term, the market is a voting machine. In the long term, it is a weighing machine. Don't tell me what their 3P reserve is, what's their FFO, what's their all in cost per barrel and what's their depletion rate etc. Losing 97% in 4 years is sufficient to call the conclusion.

 

Lastly, the most important thing about investing is to find out your edge, and repeat it over and over. Find out your winning baseline hit (as in the baseball game), and repeatedly hit it. I'd be shocked if anyone call OBE their baseline hit. If you already figured out your baseline hit, and have been doing well this year, then it is ok to have 1-2 long shots like this and just have fun like gambling in Las Vegas. If you have not figured out your baseline hit, or have not been doing well this year, then there is absolutely no point to have a long shot that drifts away from your baseline hit. This is an important money management rule at least for me.

 

[heth247]

There is a saying that in the short term, the market is a voting machine. In the long term, it is a weighing machine. Don't tell me what their 3P reserve is, what's their FFO, what's their all in cost per barrel and what's their depletion rate etc. Losing 97% in 4 years is sufficient to call the conclusion.

Most of the Canadian O&G companies lost 50%~90% values over the last 4 years. Isn't the market voting them in the same direction? So what is the right "threshold" to tell which are good and which are bad? Is it -50%, -75%, -80%, or -90%?  Or, are you suggesting that the whole Canadian oil industry is doomed and should be avoided because market voting machine (over the last 4 years) has made the verdict already? 

 

Lastly, the most important thing about investing is to find out your edge, and repeat it over and over. Find out your winning baseline hit (as in the baseball game), and repeatedly hit it. I'd be shocked if anyone call OBE their baseline hit. If you already figured out your baseline hit, and have been doing well this year, then it is ok to have 1-2 long shots like this and just have fun like gambling in Las Vegas. If you have not figured out your baseline hit, or have not been doing well this year, then there is absolutely no point to have a long shot that drifts away from your baseline hit. This is an important money management rule at least for me.

 

I agree with this part. Like I said, I don't have an edge in evaluating OBE's reserves or figure out what their exactly all-in cost is. But for OBE, we don't need to rely on 3P, nor 2P, not even 1P reserves at this point. Just look at their PDP for Cardium alone, which is likely what the banks conservatively based on to lend them money, and discount it further, you still have significant upside from current levels. Sometimes one's edge could be that he is willing to look and free to buy when a stock is extremely out of favor. I could imagine how stupid a fund manager will look like if he buys OBE now. :D

 

 

[muscleman]

There is a saying that in the short term, the market is a voting machine. In the long term, it is a weighing machine. Don't tell me what their 3P reserve is, what's their FFO, what's their all in cost per barrel and what's their depletion rate etc. Losing 97% in 4 years is sufficient to call the conclusion.

Most of the Canadian O&G companies lost 50%~90% values over the last 4 years. Isn't the market voting them in the same direction? So what is the right "threshold" to tell which are good and which are bad? Is it -50%, -75%, -80%, or -90%?  Or, are you suggesting that the whole Canadian oil industry is doomed and should be avoided because market voting machine (over the last 4 years) has made the verdict already? 

 

Lastly, the most important thing about investing is to find out your edge, and repeat it over and over. Find out your winning baseline hit (as in the baseball game), and repeatedly hit it. I'd be shocked if anyone call OBE their baseline hit. If you already figured out your baseline hit, and have been doing well this year, then it is ok to have 1-2 long shots like this and just have fun like gambling in Las Vegas. If you have not figured out your baseline hit, or have not been doing well this year, then there is absolutely no point to have a long shot that drifts away from your baseline hit. This is an important money management rule at least for me.

 

I agree with this part. Like I said, I don't have an edge in evaluating OBE's reserves or figure out what their exactly all-in cost is. But for OBE, we don't need to rely on 3P, nor 2P, not even 1P reserves at this point. Just look at their PDP for Cardium alone, which is likely what the banks conservatively based on to lend them money, and discount it further, you still have significant upside from current levels. Sometimes one's edge could be that he is willing to look and buy when a stock is extremely out of favor. I could imagine how stupid a fund manager will look like if he buys OBE now. :D

 

It is entirely my own opinion, but if you like a stock so much and after 4 years it is not going up, you are wrong. It doesn't even have to go down. In this internet era, it is impossible for a stock to stay ignored for that long. It is not the 1930s.

 

Why not avoid the whole sector? Are you forced to invest in it? This is not a research project where you tackle the hardest problem and figure it out and be a hero. This is a game where you find the easiest dollar and pick it up into your own pocket.

 

[ValueMaven]

why are people wasting so much time and effort on a POS penny stock at this point?

[muscleman]

why are people wasting so much time and effort on a POS penny stock at this point?

 

Because it is down 97% so it has to go up at some point. Even if it goes up to 1 dollar, it is a double and could potentially make people so much money.  ;)

[SharperDingaan]

why are people wasting so much time and effort on a POS penny stock at this point?

 

To your point, some folks just aren't worth the energy. This type of investing, or 'speculation', just isn't their thing - and they are unable to let it go. Any response is meaningless, 'cause everyone else but them is wrong - yada, yada, yada. I could care less, but it looks a lot like failure to act/FOMO to me.

 

Heth is bang-on - market value declined 97%, the assets did not.

OBE is a bet on the asset values, and those asset values rising over time. By 'plan', or by 'luck', the end result is the same. 

 

Merry Christmas.

 

SD

 

[Cigarbutt]

...

I think the altius model of project generation for royalties combined with a value investing asset buying bent could be hugely effective in Canada's oil patch. Maybe someday I'll raise some money and do it myself, as so far I haven't found anyone doing that yet that I feel comfortable investing with.

The royalty dynamics seem to be different in Canada. I've tried to look at the potential ramifications tied to vanilla royalties or overriding royalties if the operating firms run into distress. Have you looked at PSK and FRU?

You come across as a competent and straight-shooter kind of person and would appreciate if, over the next few years, you take to time to share your thoughts and/or progress on this question.

 

Sorry for the delay in replying, had a death in the family that slowed me down. I appreciate the kind words, and will share some thoughts. I cheerfully admit to not having this completely fleshed out myself, and I'm probably both too busy and not rich enough to open my own royalty shop at present. Maybe those conditions will both change in the future...

 

Anyway, from a finance point of view, I think royalties are basically just a higher part of the capital structure. Like anything else, you do a DCF (or short hand with a multiple) and probably use a lower cap rate because of the better position in the capital structure.

 

However, I think oil and gas royalties are a bit different than a royalty on a widget factory, because oil and gas royalties come attached to oil and gas assets. If you own the underlying minerals, when some terrible operator (PWE et al) chooses to over capitalize their operations you benefit. I've looked at many development plans where the marginal return on the last wells in a section of land was terrible. But management drilled them because it increased production in the short term even though it was likely value destructive. But those extra wells are value accretive for a royalty co, because they get their share of the production while not contributing to the capital in any way.

 

There are all sorts of ways to over capitalize an oil/gas field (too many gathering pipelines, too many wells, too much compression, uneconomic secondary/tertiary recovery, putting too much chemical in a polymer flood, etc). Operators do them all because the operating team wants to meet their production target (==bonuses). Its easier to over capitalize an existing field than find a new one, and most people have no imagination.

 

The other big advantage to a royalty co is that technological advances and inflation both increase the percentage of the resource that can be extracted profitably from a given field. If you buy a royalty asset and the reserve report says 10% recovery, but pricing and technology means recovery is actualy 25%, you just increased your value by 150%. (Undiscounted, but still good). By contrast, the operator needs to pay for all that fancy new technology, so the extra barrels probably increase their economics by much less. They will extract them because now marginal revenue > marginal cost, but going from 10% recovery to 25% recovery doesn't give nearly the same economic boost.

 

This is even more pronounced in cases where current technology/price says a resource shouldnt be extracted. In that case the mineral rights are often cheap, and a royalty co can benefit greatly when the technology/cost curve makes those assets developable. This is the type of asset I would buy for project generation purposes - something where the resource is known to be there but isn't economically extractable at present. Horn river is a good example. Lots of dry gas that isn't economic, and the land is cheap right now.

 

On the existing public companies, I own FRU but not PSK. There are only 2 sets of significant private minerals in W. Canada - those that the Hudsons Bay kept when they sold the land to the Dominion of Canada, and those the CPR got when they built the railroad. FRU has a subset of the HBC minerals, and has moved to financing with GORs. I like GORs less, because you have operator solvency risk (somewhat depending on deal structure). I feel that is offset by FRU management quality, which I deem as excellent. Everyone I know at FRU is diligent and competent, and they have a great reputation for finding mistakes in the payments others make. I don't own PSK, which has half of the CPR minerals. I like the half Cenovus sold to the Ontario Teachers better, and PSK has been historically too expensive for my taste. They've gotten a lot cheaper recently however, so I may look further there.

 

If I was running my own shop I'd do two things-

 

1) GOR financing for cashflow. This would require a lower cost of capital than the juniors, which wouldn't be hard right now I don't think.

 

2) buy (or lease, more accurately) large chunks of undeveloped land with known hydrocarbon accumulations. There is tons of this out there at low prices right now, because the market has decided the cycle will never turn. Farm the land out for drilling and retain royalties.

 

Could also try and pick up the odd piece of freehold minerals, as there are a few privately owned pieces here and there.

 

While I own FRU, I don't trust them to generate new long term value. They are mostly owned an entirely run by the CN pension funds. They do a great job as administrators but I think their acquisitions are too finance oriented and not sufficiently oriented to future exploration upside. Basically, I think they are making participating loans vs oil and gas investments. That's ok, and they're trading cheaply, but I don't think they are getting enough free upside when they deploy capital. I suspect their go forward returns will be acceptable but not spectacular, which is perfectly ok given their current trading price but not likely to generate the 10x bagger discussed previously in the thread.

Thank you. You provided a very strong answer.

There are many levers available to take advantage of the overall cycle.

I held PWT for a few weeks in 2016 and, even if their debt profile has evolved versus then, thinking of prevailing conditions then, a similar additional option may be available for royalty financing or ownership when credit conditions (really) tighten (not necessarily for OBE but for the oil and gas market in western Canada in general).

The ideal scenario would involve tight credit conditions at a time when sentiment miscalculates the difference between the value of the changing proportion of non-economic to economic reserves over time.

I understand that you want to use a differentiated strategy in the event that you start your own 'venture' and this will be interesting to follow in the future.

I plan to take a deeper look at FRU and FSK in 2020 and will post separately, if applicable.

-----)Back to PWE

 

[Joe689]

This name is quite the enigma. 

 

They are on their second "interim" CEO, who happens to have very little O&G operational experience, a hedge fund manager.  They also happen to be in a strategic alternatives.  The chair has stated,

 

"As we move into the later stages of our previously announced strategic alternatives process, the Board will continue to leverage our various strengths. Having Stephen step into the Interim President and CEO role at this time will enable the Company to take advantage of his vast experience in corporate transactions and capital markets to guide us through the next period of this process."

 

Then I look at the TPH marketing package, and I see

 

"The Obsidian Board of Directors has a preference for a corporate

merger transaction, but cash asset sales will be considered to the

extent that they offer compelling value;"

 

Now I see oil at near yearly highs.    The float has turned over significantly down here.  And mere 2% buy in the past couple weeks brought the stock up near 100%.  I feel like very few shares are left to trade so they continue to shake the tree.  I think this thing transacts.  TPH confirmed the proposals have been received.

 

The word is that interim CEO, a major shareholder, hedge fund manager is commuting to Calgary.   

 

They should be at the point of picking a value maximizing option.  Heck, I think they could hedge for a year out at these prices and in return get refinanced no problem.

 

[SharperDingaan]

Just some thoughts....

 

Opinions differ, but I think we comfortably cross the USD 1.00/share threshold fairly soon. Thereafter a fairly quick run to USD 2.00/share, once institutions become comfortable there isn't going to be a future NYSE delisting, or a loan call. The reality is that any new kind of demand in quantity ... and this thing will quickly rise.

 

Good possibility there is some kind of a SR transaction, subject to reserve report confirmation. Probably transformative, and this time with only a short period between announcement and execution. Remaining asset values materially increase, as their development no longer remains a challenge.

 

While OBE would clearly prefer a merger, we think its a two-step process. We need to see how 1H2020 settles out first.

Should the stars align, some kind of transaction at the end of 2H2020 becomes a very real possibility. If only because these things take time to plan, and they will go a lot easier if its a 'merger of equals'. Alberta's incremental egress will also have been delivering for a while, TMP will be closer to completion, we will have had an extended period of higher prices (hopefully, as per the current strips - or better), & the US election outcome will be known.

 

To most OBE is purely an asset play, where value is increasing because underlying netbacks are rising on higher oil prices and lower differentials. While competent management is always nice, they just have to not BK the company.

 

SD

 

 

 

[Liberty]

Just some thoughts....

 

Opinions differ, but I think we comfortably cross the USD 1.00/share threshold fairly soon. Thereafter a fairly quick run to USD 2.00/share, once institutions become comfortable there isn't going to be a future NYSE delisting, or a loan call. The reality is that any new kind of demand in quantity ... and this thing will quickly rise.

 

How's your forecasting track record so far in this thread?