Cardboard Posted January 7, 2016 Share Posted January 7, 2016 I would like to point out TBE.DB. This is a convertible debenture due in December 2018 with a 6.25% yield. At current price, you are being paid 28% in interest a year while you wait and if it was ever trading at par again, you are looking at a 4.4 bagger. They were a conventional heavy oil producer but, now they have just over 50% of production in medium gravity oil (much lower selling discount) and the other portion is heavy oil via horizontal drilling or like GXE. Their new wells have very good economics some of the best in Canada. The company has too much leverage and like for GXE, the banks are looking to cut the line of credit. However, I think that the cut is likely just under the current drawn amount or around $10 million. Since it is a company 3 to 4 times bigger, we are not talking a huge sum to raise. They were also well hedged and this is coming to an end. As a result, the company is currently looking at strategic alternatives. An interesting comparison is Long Run Exploration which is currently being bought by a Chinese firm. The company was quite a bit more levered than TBE and they are offering 75% of par for the convertible which were also trading in the $20's before the take-over announcement. Netbacks for LRE are much lower. A large portion of production is also dry gas or over 50%. Overall, not at all the same asset quality as TBE. Another way to look at it, if you wipeout TBE shareholders and give the company to the convertible holders as it would happen if they were to force conversion or stop paying interest, the enterprise value with the convertible at par is $297 million for a 16,000 boe/d producer with 88% liquids or $18,560 per boe/d. That is a very low valuation. You can play with the numbers and assume less than par for the convertible. For example, at current price for the convertible and $0 for the shares, the EV is $231 million or $14,500 per boe/d. This is way below LRE or $24,000 EV per boe/d acquisition price tag. This is also as low as it gets in terms of trading prices out there. Assuming par for the convertible and nothing for the shares, the acquirer would get the company at an EV quite a bit cheaper than any transaction seen in the oil patch in the past year. If the asset was total garbage ok, then maybe nobody would step in but, this is better than a lot of what has been sold in these transactions and LRE is the latest example. An announcement is due soon as to what they are going to do since the bank review was done in December but, not finalized likely due to the gap that I mentioned (my guess $10 million) and lack of flexibility going forward. Cardboard Link to comment Share on other sites More sharing options...
petec Posted January 7, 2016 Share Posted January 7, 2016 Are they profitable at the current oil price? Or, to put it another way, the per boe/d valuation might be cheap but it's conceivable the reserves are actually worth nothing if they are not economic. Link to comment Share on other sites More sharing options...
Cardboard Posted January 7, 2016 Author Share Posted January 7, 2016 Netbacks in Q3 were $12.99 per boe. That is without any benefit from the hedges. The sale price per boe average in Q3 was $37.72 CDN. So I think that they are still generating money at these prices. However, netbacks do not factor in the cost of new wells to sustain your production. On that basis, nobody is profitable in NA at current prices. Their netbacks are about middle of the range when I compare to other Canadian companies producing oil via horizontal drilling and their numbers are improving with a growing portion of production from these newer, more profitable wells. Cardboard Link to comment Share on other sites More sharing options...
influx Posted January 18, 2016 Share Posted January 18, 2016 http://www.sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00001562&issuerType=03&projectNo=02436547&docId=3853200 15% today Link to comment Share on other sites More sharing options...
BG2008 Posted January 19, 2016 Share Posted January 19, 2016 Are these instruments traded over on exchanges or do you need a bond/debt trader to buy/sell securities? Link to comment Share on other sites More sharing options...
Cardboard Posted January 19, 2016 Author Share Posted January 19, 2016 You can buy that crap directly with your regular online brokerage account. Kidding. The company seems confident that they will have some deal by the end of the quarter so the catalyst is coming very quick. If not, the next catalyst is April 30, 2016 when the non-revolving part of the renewed credit line comes due. They would be short $67 million using current debt level. I think that the banks have given them that grace period because management must have kept on saying that they would have something by the end of Q1 and it seemed probable. If not, there is no point for the banks to give a 3 1/2 month lifeline. Just call the loan now. In case, that they cannot secure a deal at proper metrics, find a partner or issue shares, then the next step is to convert all or a portion of the convertible debentures to shares at roughly current share price or likely lower. This would nearly wipeout current shareholders, significantly reduce or eliminate unsecured debt along with up to $5.3 million a year in interest payments and the banks would make the $85 million non-revolver go away and be part of the regular credit line with same maturity in 2017. The debenture holders would then own the company and at $15 for the converts, that is a very low EV/boe/d or EV/2p reserves multiple. It could then be even more attractive to suitors since there is no longer a need to pay $85 million or par for the convertibles (note: the LRE take-over deal is offering 75% of par for their convertible which is unusual and risky). Just offer a premium interesting enough to shareholders. And if it goes into bankruptcy courts, then the process takes so long that oil could be at $60 by then or much easier to find buyers to pay the banks, converts and shareholders. We will see how this goes but, I see many options. The key is the very low current price to get attraction: $318 million EV assuming par for the convertible vs 16,000 boe/d or just below $20,000 per boe/d. Nobody has made a deal of any significance at such low metrics yet and I should remind you that this is in CAD$ making it $13,700 U.S. per boe/d. Cardboard Link to comment Share on other sites More sharing options...
BG2008 Posted January 20, 2016 Share Posted January 20, 2016 Cardboard, just wondering where one would buy/sell these converts. Thanks in advance. Link to comment Share on other sites More sharing options...
Potato Posted January 20, 2016 Share Posted January 20, 2016 Cardboard, just wondering where one would buy/sell these converts. Thanks in advance. They trade on the TSX: http://web.tmxmoney.com/quote.php?locale=en&qm_symbol=TBE.DB Haven't had a chance to do any research yet so no opinion. Link to comment Share on other sites More sharing options...
SafetyinNumbers Posted February 2, 2016 Share Posted February 2, 2016 Cardboard, From what I read in the prospectus, there is no mechanism to convert the debentures into stock until the end of this year and only if its trading 25% above conversion price or at maturity. Is that what you understand too? I own some of these and I'm surprised there isn't a little more speculation heading into what could be an extremely positive catalyst in the next 8 weeks. Link to comment Share on other sites More sharing options...
Cardboard Posted February 2, 2016 Author Share Posted February 2, 2016 You are correct, my bad. What I described or a redemption of principal with shares at 95% of current market price can only happen after December 31, 2017. Between Dec 31, 2016 and Dec 31, 2017, the condition that you mentioned applies. These debentures have terms near identical to the ones issued by Long Run Exploration except that LRE.DB mature one month later. So that option is off the table. To "get rid" of them before Dec 31, 2017, the corporation would have to make some tender offer (would need cash from an asset sale and bank approval to pay anything on the convertible before them) or make a bid with acquirer cash (like LRE) or settle their value under bankruptcy proceedings after repaying the banks and other prior claims. The market seems to be pricing in that either they won't find any offer and will go bankrupt or that they will sell a portion of the company and barely stay alive as a going concern. What is incorrect from Mr. Market is that the convertibles are worth altogether $9.4 million tonight from a par of $85 million and the common shares are worth $28 million. And from the kind of trading that I am seeing in these convertibles (price/volume/price swings), the buyers/sellers do not appear any more sophisticated than common shareholders or what one would expect from bond vigilantes. Cardboard Link to comment Share on other sites More sharing options...
SafetyinNumbers Posted February 2, 2016 Share Posted February 2, 2016 It doesn't make a lot of sense to me either. The way it reads to me, there is no redemption privilege at the option of the company after Dec 31, 2017 until Dec 31, 2018 when they mature. If we get to that point it's a pretty good return from interest alone! I wish I had some insight into the strategic alternatives process. This seems to be a very favourable risk/reward scenario. Link to comment Share on other sites More sharing options...
Cardboard Posted February 12, 2016 Author Share Posted February 12, 2016 This trades like it is truly game over for the company. The current EV with the convertible and stock trading where they are is $238 million or roughly $14,500 CAD per boe/day. I challenge anyone to go find an oil & gas producer of decent size in NA trading at such low values. Over half of their production or their Provost field is medium gravity oil. This is worth something. The other half is heavy oil from the Lloydminster area. This is worth a lot less due to the heavy oil discount. However, horizontal drilling has drastically reduced costs vs conventional drilling for heavy oil. See GXE or their Q3 report. There is money to be made with these wells when the spread between light and heavy is not as stressed as right now. This may end up a $0 if there is no buyer but, the bankruptcy process is not something resolved overnight. Oil could move back up a lot during the proceedings which could change the equation for the convertible. The stock I would not touch. I also think that the vote on LRE on February 29 may play a part in how this situation unfolds. LRE is trying to offer 75% of par to convertible holders. If this is accepted, then TBE can use that as a precedent for any offer. John Brussa is involved with both companies so that must be one aspect being discussed. Cardboard Link to comment Share on other sites More sharing options...
SafetyinNumbers Posted February 12, 2016 Share Posted February 12, 2016 I keep telling myself not to add anymore but I bought some at 9 yesterday. They are due to report on March 22 so I imagine that is the day we get the results of the strategic alternatives process. It seems like all of the speculation is in the equity price (equity value of $23m vs the debentures value of $8m). Link to comment Share on other sites More sharing options...
Packer16 Posted February 12, 2016 Share Posted February 12, 2016 The only other O&G firms trading at those multiple are Gear and Journey energy. At this point I like Gear because they appear to designed to survive. Packer Link to comment Share on other sites More sharing options...
Cardboard Posted February 12, 2016 Author Share Posted February 12, 2016 I would have to check for Journey but, Gear is trading at $20,000 per boe/d. Also, GXE is 100% heavy oil while TBE is just under 50%. And regarding the design, GXE has $13,800 of debt to support for each barrel produced while TBE has $17,700. However, that is assuming the convertible at par. At current price for the convert, TBE has $13,000. Finally, TBE will likely have the option of selling one field and keeping the rest while GXE is all-in one field. I am not saying that GXE is not good. It is a company that I follow and with some cash on hand, I would likely pick up some shares. I am just saying that TBE.DB is cheaper currently and that the capital structure for the companies is not that different. Said differently, if TBE could obtain the same valuation as GXE trading valuation under a change of control (normally a premium is paid), the convertible is worth par and the stock just a tad higher than current. That is a 10.5 bagger plus interest. I am assuming that this won't happen and that they will offer something north of $60 per $100 of debenture. That would still be an incredible return in a short time frame. I have reviewed the debt load, price and assets of some other players who got in trouble or namely Spyglass and Argent. I don't think that the expectation of TBE obtaining close to $20,000 per boe/d is agressive at all. Cardboard Link to comment Share on other sites More sharing options...
Packer16 Posted February 13, 2016 Share Posted February 13, 2016 You must mean CD$. My bad. Packer Link to comment Share on other sites More sharing options...
Packer16 Posted February 20, 2016 Share Posted February 20, 2016 Are there any TBE.DB holders that would stand in the DB' s corner if a buyer cannot be found? If not, what do think the odds are that the buyer would buy the bank debt and provide nothing to the DB holders? Packer Link to comment Share on other sites More sharing options...
SnarkyPuppy Posted February 20, 2016 Share Posted February 20, 2016 How are you buying these? The opportunity is clearly attractive but I am having trouble finding the CUSIP on my retail account. Do I need to call a desk? Link to comment Share on other sites More sharing options...
Cardboard Posted February 20, 2016 Author Share Posted February 20, 2016 First of all, there is not a single transaction in the oil patch that I can find that has been done anywhere near close $13,000 boe/d or the current debt plus current value of the convertible. And the debt is being repaid with whatever cash flow is coming in now. All deals were done at much higher prices even for a bankrupt player such as Parallel Energy as I pointed out on Stockhouse. Now, this stalking horse bid was made in November but, the quality of the assets is nowhere near close. Then you have LRE being executed right now at $24,000 boe/d. Again lower quality IMO. Then you have ERF with a deal north of $35,000 boe/d for natural gas. Finally, if you look across the sector, there is no one trading at these multiples. There is a possibility that no buyer will be found either for the entire company or one of its two main assets before bankruptcy. Then a stalking horse bid or low ball bid will likely emerge that may or not cover the bank debt. The possibility that someone then shows up with a higher bid at these prices is quite likely looking at what kind of metrics have been paid in the industry. Then it is an auction or just like what is going on now. I also think that National Bank knows about these various deals and the kind of price that this should trade at under a $40-45 WTI environment so, they may show some flexibility come April to remove the fire sale sign on this. Why risking losing any money when the principal and interest should be repaid in full? I have noticed that the CFO did buy the convertible not that long ago. Management and the board also invested a significant sum into this company's common stock. I do believe that they will find other solutions if no real bidder shows up: share issuance (Manitok did it), farm-out, some financing with private equity, etc. If $30 oil persists is there risk of a $0? Absolutely. It just looks odd based on what has been dealt in the oil patch so far. Also worth mentioning that the WCS discount, or for heavy oil, has shrunk dramatically over the last few weeks to about $10 CAD. A lot of heavy oil has been shut-in and refineries still need the heavier grade since they can't process only the ultra light grade coming from shale oil. That is very good news for Twin Butte and Gear Energy. Cardboard Link to comment Share on other sites More sharing options...
Cardboard Posted February 20, 2016 Author Share Posted February 20, 2016 You buy them on the Toronto Stock Exchange or like all Canadian convertible debentures. They trade more or less like a stock. Cardboard Link to comment Share on other sites More sharing options...
Cardboard Posted February 20, 2016 Author Share Posted February 20, 2016 One concern that a potential acquirer may have with Twin Butte is the amount of decommissioning liability which is relatively high. However, if you divide that amount by their Property and Equipment, you obtain a percentage that is in line with many players and about identical to what they have at Gear Energy. So this is something to think about for someone looking to buy the entire firm but, not as much as a concern for someone looking to buy a portion of the company. An acquirer of the entire company would also have to weigh that against a large asset or $644 million of tax losses coming with it. For comparasion, bank debt is $207 million. Cardboard Link to comment Share on other sites More sharing options...
influx Posted February 22, 2016 Share Posted February 22, 2016 One concern that a potential acquirer may have with Twin Butte is the amount of decommissioning liability which is relatively high. However, if you divide that amount by their Property and Equipment, you obtain a percentage that is in line with many players and about identical to what they have at Gear Energy. So this is something to think about for someone looking to buy the entire firm but, not as much as a concern for someone looking to buy a portion of the company. An acquirer of the entire company would also have to weigh that against a large asset or $644 million of tax losses coming with it. For comparasion, bank debt is $207 million. Cardboard I am yet to read - what are the expenses to maintain in proper order all of the properties / licenses ? Say this is lower for longer, (I see this phrase is catching up), say 3 years. A potential acquirer will have to pay (assuming production is shutdown) how much: 1. debt interest payments 2. licensing fees 3. properties fees 4. royalties maybe 5. what else? Link to comment Share on other sites More sharing options...
LesPaul Posted March 1, 2016 Share Posted March 1, 2016 Interesting idea Cardboard and I'd like to say I appreciate your posts regarding Canadian debentures - I've been watching TBE common (and DB) wildly move up recently with output freeze talks and the completion of the Long Run deal. I'm happy this investment seems to be working for you recently! Link to comment Share on other sites More sharing options...
Cardboard Posted March 2, 2016 Author Share Posted March 2, 2016 Thank you! I appreciate that very much. Although, the build in inventory of 9.9 million barrels according to API will hurt sentiment for energy tomorrow. The game is far from over and it remains to be seen what they will do. As I mentioned on Stockhouse.ca, this big move up in the shares opens the possibility for a large investor to acquire a large stake via a rights issue and acting as a backstopper or by buying shares directly along with warrants. If they are able to raise $25 to $30 million that way, that should be enough proceeds to apply to the bank line and get the lender to go back to a normal revolver for the entire line as it was previously. This would remove the fire sale sign from the company and open up more options. A new bank may also come along since this company does not have an abnormal amount of bank debt per boe produced or to their reserves. My understanding is that their current bank has a strong desire to reduce their loan book to the industry. People do forget that Provost is their largest production and is medium gravity oil, not heavy oil. This is priced very near light oil. This has to be worth around $30,000 per boe/d. That is $260 million or enough to repay the bank line in full and over 60% of the convertible. Also, if you are to look at the shares of GXE today, then heavy oil extracted horizontally must be worth something and that is under half their production. Cardboard Link to comment Share on other sites More sharing options...
LesPaul Posted March 4, 2016 Share Posted March 4, 2016 The common has been quite volatile lately (on some high volumes); however, the DBs seem to have settled in these past couple of sessions with some very low volume. I think I'm going to start to nibble here on the DBs and see what I can get within reason - especially with some potential news coming very soon. Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now