PBN - Petrobakken

[Swizzled]

Petrobakken has a big land base in the Bakken and Cardium and should be able to grow production for the next 10 years.  It has sold off a bit as quarter on quarter production has actually declined due to poor weather in Western Canada this summer which slowed everything.

 

I think the Bakken wells are actually outperforming expectations (see recent company presentation).  I've done a rough valuation in the link below (note there is a typo, should be $5.2bil, not $4.0 bil). 

 

You have to have an opinion on oil to own this or any other producer in my mind.  I'm quite bullish on oil over the next decade.

 

http://valueinvestorcanada.blogspot.com/search/label/Petrobakken

[Myth465]

Isnt it smarter to buy PBG to get PBN at a discount. Similar to buying Loews instead of CNA. Or has PBG not declined with PBN?

[Swizzled]

 

I think it is unquestionably smarter to buy PBG than PBN.  You buy PBG and you basically pay for the current mkt price of the subs PBN and PMG (which is being spun out Dec 31).  You get the parent co assets for free.  I've written a few times about PBG

 

http://valueinvestorcanada.blogspot.com/search/label/PBG

 

I do own some PBN for a family member who likes the yield in an RRSP account.

[Myth465]

Im working my way into all of these oil and gas plays. Too little capital and too many ideas. I think there about 5 - 10 quality names floating around out there. I plan to buy PBG at some point, didnt think the spinoff would happen so soon and it moved up significantly. It seems to be slowly pulling back.

[vinod1]

I only have a superficial understanding of Oil and Gas industry but reading valueinvestorcanada blog and Myth's comments are enormously helpful for me.

 

How do you guys value reserves? I have seen valuation of reserves using either PV-10 (SEC standard way of using 12 month avg spot prices) or Strip prices, but it seems to me that you need to estimate the reserves using some conservative estimate of oil/gas price to minimize the influence of wide swings when using either SEC way or Strip pricing. What baseline price expectations to have for Oil and Gas when valuing these companies?

 

Thanks

 

Vinod

[Myth465]

I think my understanding is still a bit unsophisticated and too financially driven, but its growing. I think when investing in commodity companies you need to either have a feeling on the direction of the commodity or need to be buying the absolute lowest cost producers. I also think it pays to think about these things qualitatively. Its why I like SD, Ward seems to say the right things from an operational perspective. I do however wish he was a bit more quantitative when it came to the BS.

 

I think Nat Gas is in a glut so I wont buy nat gas companies. Many think they are bottoming and now is the time to buy low cost producers. This works most of the time in commodities. I think Nat Gas is more of a paradigm shift, and the industry has no discipline. There are many uses for gas on the horizon (electric cars, rotation of coal plants to nat gas, as a transportation fuel, and for oil sands) but these will take time. I believe the US will benefit from this shift, but dont think the producers will unless discipline returns.

 

I would only buy a nat gas company that was 1. properly hedged for 2-3 years at $9 or so, had plenty of oil and could turn on gas when prices rebounded, or could produce gas for $2.5 (all in costs) or so generating a positive return with prices at $3 (which would kill everyone else).

 

-----

 

I am a peak oil, peak cheap oil, peak conventional production kind of guy. In 2008 I watched probably half a dozen documentaries on it and it seems to make since to me. Smart people such as Buffett and Grantham, also seem to agree. We also have a secular growth story world wide with the rest of the world trying to copy the US from a lifestyle prospective. If they consume even 30% of what we do then .... China running around buying commodities up, confirms the theory also.  Over the long term I think oil prices will be higher. Over the short term its a crap shoot. If the economy slows oil will pull back. I also like oil as a dollar hedge.

 

So that sets up my foray into the oil patch. So I like the long term prospects and want a bit of leverage, so lets look at the producers.

 

With that said I value reserves using PV 10 which take into account current day oil prices and costs. I think prices will be higher in the future and look for high cash flow or hedges to protect me in the now. I use all the available metrics to value these firms.

 

1. I prefer cash flow with low / no debt. Cash flow of maybe 4x-5x with plenty of predictable drilling locations / production increases would be my favorite metric. Hopefully the oil is low to medium cost, with ok netbacks.

 

2. Next is reserves. I like reserves but need a huge discount because reserves sit in the ground and cant earn much money (CHK seems to be good at flipping though). They also suck when prices fall. I like SD or ATPG and prefer companies with nice reserves / locations with big production increases coming soon. I think the market pays for production and cash flow, so I want that to be around the corner.

 

3. Production. I dont really pay up for this. If production is good then cash flow should be good, and they should track each other. The only exception is if a huge amount of production is coming online, but it usually is matched with large reserves which arent being properly valued.

 

------

 

1. These are my favorite type plays but are hard to find.

 

2. I think these offer the best returns but can be nerve racking. SD and ATPG are debt laden and really need to execute for us to get paid. We also need the economy to hold up over the short term or for them the hedge significantly.

 

Aside from that I think qualitatively and like kickers. Maybe excess land, a new technology (Thai), unbooked reserves, smart manager, other assets (pipelines, production assets), fully integrated, skilled management, good wildcatters, tons of drilling locations.

 

I cant value these and dont try, but I like them. I may buy if PV10 is 20% above the EV if I have half a dozen kickers I like. I may want 100% above if I have no kickers or hedges. I may buy something like CEN if its trading at 2x projected cash flow. It just all depends. I would buy something like PBN due to Thai, I dont know what its worth but PBN is trading at the value of 2 subs, but has I think 4 businesses. Thai is tough to value but its basically free and could be a game change. If not you still have the others to anchor on.

 

I like plays like that. I want a situation where I earn a great return should prices stay the same, I dont loss money if prices fall for a short term (hedges), and I make out like a bandit should prices continue to rise. I start with PV10 and make qualitative adjustment. PV10 is great at $40 oil (extremely conservative), ok at $60, needs a slight discount or some free kickers at $80, and should be cut significantly at $140.

[biaggio]

Myth, do you depend on the independent engineering assessments done by the companies to determine PV10 ?

 

 

[Myth465]

Ya. the calculation would be quite above my head lol. I rely on it plus the Auditors to give me some sort of estimation of current value. Then subtract out the debt. One should probably make an adjustment for G&A and Taxes (depending on if you are viewing it as a going concern).

 

The variables listed below are far too complex for anyone not in the industry to calculate. I like PV10 because it takes into account most of the estimated costs to bring the oil out of the ground and has a pretty high discount rate. I use it as a thumb in the air valuation then move up or down based on the oil price they used.

 

PV10 – When used with respect to oil and gas reserves, PV10 means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect at the determination date, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%.

 

As the basis for calculation of PV10, reservoir engineers develop a reserve report for each existing well, whether producing or shut-in, and for each proved undeveloped well location. The reserve report takes into account:

 

(i) current rate of production (or estimated initial rate of production of a proved undeveloped location);

 

(ii) the rate at which production, assuming no further reserve additions, is expected to decline;

 

(iii) future production costs unique to each well;

 

(iv) development costs associated with the proved undeveloped reserves; and

 

(v) any production taxes that must be paid. To calculate the estimated future gross revenue to be generated from the production of proved reserves, engineers must apply an expected price to be received from the sale of such production. Such expected price typically equals the price in effect at the determination date either held flat or escalated at some appropriate rate.

[vinod1]

Thanks Myth.

 

1. From what I learned PV10 (a) does not take into account asset retirement obligations (b) uses current production costs i.e. it does not take into account any inflation or increase in costs. This is somewhat balanced by also not assuming that price of Oil/Gas increases. Thoughts?

 

2. Do you mean that you want to buy at 4x to 5x present/near term cash flows?

 

3. How can you determine if a company has plenty of predictable drilling locations?

 

Vinod

[Myth465]

1. I believe you are correct, I also think you have a pretty high discount rate which helps a bit.

 

2. Oil and gas companies tend to trade for low cash flows because alot of the cash is reinvested and because the business is cyclical. I think 4-6 is the normal range more or less. With something like CEN, they had near term production coming online which wasnt reflected in the Share price. You were able to buy it at 2x forward CF, and could hold until it was revalued to 4 or 5 times.

 

I am pretty flexible on CF, but typically want a pretty decent cash flow yield. Finding something with a high FCF yield is tough because it mostly gets reinvested. ATPG and SD are interesting because the value will be in the future cash flow once that production comes online. Currently CF multiples suck.

 

3. Typically they tell you. If you review the presentation by Tom Ward for SD you will see that they have a ton of locations. Basically more then they know what to do with. What you dont want to do is buy something with great cash flow but only 3-5 years of reserves and no new prospects. If you buy a company like that you have to understand that its basically liquidating or in run off.

 

If the company is an MLP / Trust, I like to look at the reserve life to make sure its pretty long. They have to replenish the reserves for it to stay in business.

 

Predictable is interesting. Something like Contango O&G is going to drill a dry hole but they may hit something that doubles the value of the company. Something like SD or ATPG will not drill many dry wells, but isnt likely to find a whale either. If you want an Exploration company you are basically betting on Management inmo.

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDA0NjI3fENoaWxkSUQ9NDEzMjExfFR5cGU9MQ==&t=1

 

Page 3 shows locations.

 

[tyska]

They sure have been buying back a lot of shares lately though, and some other insider buying thrown in. Personally I would prefer if they used the money to up the div if supporting the share price and rewarding investors is what they are after. I always get the feeling that buybacks are just used to hide the fact that they are diluting like crazy with options.

 

Dan

[vinod1]

Thanks Myth.

[Myth465]

Speak of the devil, I should have held on to CEN.

 

http://www.google.com/finance?q=CVE:CEN

 

Up 25% since my sell to switch into ATPG and SD. I may 25% - 36% on my shares after about 3 months. ATPG owes me some opportunity costs. CEN was / is a very simple sorry while SD and ATPG are much more complex. Hopefully it is worth our wild.  

[Swizzled]

 

Some insider buying at PBN to go along with the company buying back shares.

 

Pretty decent purchase too.

 

Am I the only person who finds the SEDI site utterly confusing ?  I'm so much better with the sec.gov.

 

http://www.investorvillage.com/smbd.asp?mb=16274&mn=266&pt=msg&mid=9774405

[nodnub]

Am I the only person who finds the SEDI site utterly confusing ?  I'm so much better with the sec.gov.

 

You're not the only one!  After using SEDI for years I still think it sucks.

 

It seems like it was built by someone with no understanding of how it would actually need to be used. It is one of the least efficient web information systems that I have ever had the misfortune of interacting with. I wish the plague on the designer :)

 

 

[gordoffh]

looks like a couple of other insiders buying now -

 

Nov 24/10  Nov 23/10  Brown, Ian Stephen  Direct Ownership  Common Shares  10 - Acquisition in the public market  2,500  $18.750 

Nov 24/10  Nov 23/10  Brown, Ian Stephen  Direct Ownership  Common Shares  10 - Acquisition in the public market  2,500  $18.690 

Nov 24/10  Nov 23/10  Brown, Ian Stephen  Direct Ownership  Common Shares  10 - Acquisition in the public market  1,500  $18.730 

Nov 24/10  Nov 24/10  Wright, John David  Direct Ownership  Common Shares  10 - Acquisition in the public market  1,800  $18.830 

Nov 24/10  Nov 24/10  Wright, John David  Direct Ownership  Common Shares  10 - Acquisition in the public market  1,100  $18.870 

Nov 24/10  Nov 24/10  Wright, John David  Direct Ownership  Common Shares  10 - Acquisition in the public market  900  $18.860 

Nov 24/10  Nov 23/10  Wright, John David  Direct Ownership  Common Shares  10 - Acquisition in the public market  800  $18.840 

Nov 24/10  Nov 23/10  Wright, John David  Direct Ownership  Common Shares  10 - Acquisition in the public market  5,200  $18.850 

Nov 24/10  Nov 23/10  Wright, John David  Direct Ownership  Common Shares  10 - Acquisition in the public market  3,000  $18.810

 

[bargainman]

I was looking at the annual report here:

 

http://www.petrobank.com/wp-content/uploads/2010/04/PetroBank-AR-2009-web.pdf

 

and on page 38 (40 in the PDF), it says that the Heavy BU which is estimated at $2.3 Billion (I think later in Nov they say 3.3 so things have changed) has 0 proven, $370 2P, and $1958 "best estimate contingent".

 

So how does one value this?  I'm not sure what the change has been to make it 3.3 since then.. but..  It seems to me that "best estimate contingent" is definitely less certain than the proved or probable no?

 

Any thoughts?

[Swizzled]

"So how does one value this?  I'm not sure what the change has been to make it 3.3 since then.. but..  It seems to me that "best estimate contingent" is definitely less certain than the proved or probable no?

 

Any thoughts?"

 

Just to be clear, you are talking about Petrobank and this thread was on Petrobakken which is the subsidiary.

 

Petrobank doesn't have approval yet from the Alberta gov't so they can't get any reserves booked on May River (the big HBU property) at this point.  Approval pending and not a concern that it will happen but that is why no P1 or P2 numbers.

 

The key to me again, just like with the THAI technology is that you don't pay ANYTHING for these assets at the current share price.  But 700 million BOE is worth something.

 

A valuation method to consider is looking at the acquisition price per barrel the Chinese have been paying for their various oil sands acquisitions in the past couple of years.

 

http://valueinvestorcanada.blogspot.com/

[bargainman]

Sorry for confusing Petrobank and Petrobakken...  I was wondering why insiders were picking up Petrobakken since Petrobank is spinning out shares.. but then I realized they're spinning out Petrominerales not Petrobakken. sigh..

 

Well i did a quicksum just now, and it looks like

 

For every Petrobank share at $41.03 you get:

.62 Petrominerales share, for $18.24 value of the Petrobank share

1.035 Petrobrakken shares, for $19.62 value of the Petrobank share so...

 

that leaves about $3.17 per petrobank share for its HBU + THAI tech.. so..  at 106 million shares outstanding that's about  $336 million...  so that's not "free" right?  It is cheap though or is it?  How much does one usually value contingent supplies at?  at 660-700 million, that's about $0.50/ barrel?  What the usual price?

 

Thanks

 

[Swizzled]

"that leaves about $3.17 per petrobank share for its HBU + THAI tech.. so..  at 106 million shares outstanding that's about  $336 million...  so that's not "free" right?  It is cheap though or is it?  How much does one usually value contingent supplies at?  at 660-700 million, that's about $0.50/ barrel?  What the usual price?"

 

Those numbers move around quite a bit depending on the stock price of the subs.  I've seen the parent assets valued at almost exactly zero and with some implied value as you point out.

 

My basic opinion at this point is that:

 

1) PBN is likely worth at least $27 per share

2) PMG might be worth about $30 per share but I have no idea how much upside there is or even how to quantify it.  They have hit something like 11 of 12 exploration wells so far and grown production by 100% for four consecutive years.  According to them they have explored about 5% of what they plan to.

3) So combine what I believe in those two and I think I get a good or fair deal getting PBG for $50 or under.

4) The HBU unit excluding THAI has 670 million BOE of contingent reserves and that excludes both Kerrobert and Dawson.  Dawson as per the last quarterly release has been assigned about 200 million BOE in place by the reserve auditors.  The production plans for the three are as follows.  Kerrobert 7,000 BOE per day which should come on next year.  Dawson 25,000 BOE per day which will come on in 2012.  And May River eventually 100,000 BOE per day.  Slap a flowing barrel figure on this and it is worth billions obviously (PV 10 on the contingent was $3.3bil I think).  But the company has to execute their plans here. 

5) THAI which could be the most valuable of the 4 pieces.  Their reserve engineers agree the process works and according to PBG they will assign THAI reserves at this year end.  PBG is putting their money behind their claims by expanding Kerrobert from a pilot to full scale development.  And are further claiming that 2 licenses with international oil companies so use it will happen before year end. 

 

Here are some details on THAI and PBG

 

http://valueinvestorcanada.blogspot.com/search/label/PBG

 

So long story short.  PBN and PMG in my mind alone will make PBG at this price a fine acquisition.  The other two pieces have the potential to be at least as valuable if not more.

 

I think it will be very hard to lose much money given the vast assets of PBN and PMG, with good odds on this eventually being a double or more.

 

[gokou3]

"that leaves about $3.17 per petrobank share for its HBU + THAI tech.. so..  at 106 million shares outstanding that's about  $336 million...  so that's not "free" right?  It is cheap though or is it?  How much does one usually value contingent supplies at?  at 660-700 million, that's about $0.50/ barrel?  What the usual price?"

 

This Barrons article says that similar transactions value the oil sands at $1.6 per barrel of recoverable oil.  So 660M barrels x $1.6 / 106M O/S = $10 per share?

http://online.barrons.com/article/SB50001424052970204878604575491770387505394.html

 

For the aggressive investor, would the reward per risk be highest to be long on the Petrobank stub, i.e. buy petrobank and sell short the effective ownership of PetroBakken and PetroMinerales?  The Barrons article from Sep 2010 also noted that the stub was priced at -$8.39!  That said, I checked Interactive Brokers and they don't seem to offer PetroMinerales for short selling.. so may need to wait for spin-off to be completed.

[Swizzled]

 

I might as well confuse this thread further by bringing up the second subsidiary PMG as well.

 

Another big exploration success today.  What a success story this company has been.  Plus Dawson approval for the parent company.

 

Detailed here:

 

http://www.gurufocus.com/news.php?id=115470

[Guest Bronco]

Swizzled - I am not a doubter, just ignorant.  Why did so many companies cut their price targets on the P-bank?

 

What do you feel is FMV for the company?

 

 

 

 

 

 

[Swizzled]

 

Nothing wrong with being a doubter.

 

I think it is a case of reacting to the stock price.  Petrobakken is down from $35 a year ago to under $19 today.  The analysts do a sum of the parts for Petrobank, so they move the parent down based on the stock price action, not based on the actual intrinsic value of Petrobakken.

 

This would lead you to why is Petrobakken down almost 50% ?  Two part answer I think (a bit silly to speak on why the market decides to do what it does).  First is that they have bought about $1billion of acreage in the Cardium, so that is a big spend on raw land and some people just didn't like it.  Second is that weather delays (very wet in western canada right through October) have really delayed completing much of the drilling for Q2 and Q3 and have resulted in a much slower production ramp up. 

 

I trust that they made a decent decision to go big in the Cardium.  It is hard to dispute that these guys aren't good businessmen.  Hard to know for sure until the production is on line.  As far as a weather delay, that makes no difference to me as I don't care if everything is a quarter later than promised.

 

As far as intrinsic value for Petrobank I think I'd prefer to answer as follows:

 

1) Petrobakken and Petrominerales market caps support pretty close to the $40 share price today for PBG. 

2) I think Petrobakken likely is worth 30% to 50% more than $19 per share.  I wrote about why at the start of this thread.

3) I think Petrominerales is pretty fairly priced on existing production and reserves.  So you don't pay much for whatever their exploration program results in.  They have 40 exploration wells being drilled next year alone.  If you look at what they have done over the past 4 years I feel pretty good about believing them when they say they think they have really just scratched the surface.

4) So at $40 PBG gets me the two subs at share prices that I am very happy to pay.  Which means I think that there is say $50 of intrinsic value in PBN and PMG.

5) They have just started commercial operations in their heavy oil business unit.  They claim NPV of reserves is something like $3 billion, the plan is to reach 125,000 BOE of production.  These properties can be developed without THAI so they have value on their own.  It is 700 million barrels of oil.  What is this worth ?  Something between say $300mil (based on value should they sell the oil sands reserves in the current undeveloped state) and $3 billion using a PV10 valuation.  Or $3 to $30 per share.  I know it is worth something, and I know I'm not paying anything for it.

6) THAI.  How do you value a technology that could result in doubling the economically producable heavy oil reserves in the world ?  Again it is worth something between $0 and billions.  And it actually appears to be working.

 

So I don't know what PBG as a whole is worth.  I think the two public subs are likely worth over $50 and I'm only paying $40 for them.  I think the heavy oil unit is worth at least $3 in a they never develop it scenario and maybe more like $30 in a couple of years as they develop it.  And I think THAI is worth $0 to lord only knows.

 

I just don't think I can lose much given the value of the assets in PBN and PMG.  And it isn't very often that you can have a fairly small downside and get a roll of the dice on something like THAI especially at this stage of development where a lot of the doubts about it have been removed.

 

My best attempt to answer your question would be an intrinsic value range of $50 to much, much higher if THAI really takes off.

 

I qualify the limited downside comment by saying that I am convinced that oil prices of $60 plus are here to stay. 

 

http://valueinvestorcanada.blogspot.com/

 

[Swizzled]

 

And already more successful drilling for PMG.  Yenac -2  comes on at over 2,900 barrels per day.

 

http://valueinvestorcanada.blogspot.com/2010/12/more-drilling-results-from.html