PBN - Petrobakken

[Guest Bronco]

Swizzled - great work on this and thanks. 

[Swizzled]

 

No problem.  But you can defer the thanks until we are sitting on a big capital gain.

 

The big news I'm waiting for is on a licensing deal for Petrobank and THAI with at least one national oil company before year end.  They said they expected two to be signed before the end of the year.

 

There will likely be news on at least 2 more PMG wells before year end also.

[Swizzled]

 

Some decent news for Petrobank I think regarding the likely timing of approval for their main oil sands development

 

http://valueinvestorcanada.blogspot.com/2010/12/alberta-to-speed-up-approvals-of-new.html

[Swizzled]

 

News flow here is relentless.  Analyst field trip to Kerrobert with encouraging report.

 

http://valueinvestorcanada.blogspot.com/2010/12/analyst-notes-from-dec-1-field-trip-to.html

[Swizzled]

Wasn't it yesterday that I said the news flow is relentless ?  I'm back again today.  Petrominerales appears to have found what they were hoping to find (which was something big) on their heavy oil Rio Ariari block.

 

http://valueinvestorcanada.blogspot.com/2010/12/petrominerales-news-never-stops-success.html

[turar]

Swizzled, any comment on this article? http://www.edmontonjournal.com/Undeveloped+Alberta+Bakken+generates+buzz+next+play/3949130/story.html  Petrobakken has nothing in Alberta Bakken, right?

[Swizzled]

 

As far as I'm aware Petrobakken doesn't have anything in the new "Alberta Bakken".  Crescent Point picked up a million acres for $96 million earlier this year from a private company with financial woes.  Could out to be a giant homerun for them.

 

The problem I have is how do you know if they are optimistic on the play or if they know what is there.  With the original Bakken and the Cardium there really isn't much doubt about what you have if you have acreage inside the known boundries of the play.

[value-is-what-you-get]

Just re-reading some Seth Klarman and I think we have a decent candidate here for a non-index listed spinoff being sold off by institutions who track the index.  PBG and PBN are S&P TSX composite member companies whereas PMG is not.  When PMG is spun out, there will be some automatic selling by institutions irrelevant of value.  Don't know how much this will widen the margin of safety but if you want to own PMG it may turn out to be a good opportunity.

[Swizzled]

 

I count 8 different insiders buying at Petrobakken over the past month.  I tried to link to the report below, but it might just take you to Sedi front page.

 

http://valueinvestorcanada.blogspot.com/2010/12/insider-buying-at-petrobakken.html

[tyska]

Looking on INK which only goes back the last ten reports, there is one Rene LaParade selling over 5000 shares at 18.60 on Nov. 30. Still wish they would just raise the div. instead of this 5000 share a day buyback with free cash.

[Swizzled]

"Still wish they would just raise the div. instead of this 5000 share a day buyback with free cash."

 

If we are serious about increasing value per share though the better thing to do would be can the dividend upon which we all pay tax and instead use all of that cash to buy back shares while they are cheap like this.

 

Of course the market would hate that and so would Petrobank the parent who still needs the cash flow from PBN.

[tyska]

"If we are serious about increasing value per share though the better thing to do would be can the dividend upon which we all pay tax and instead use all of that cash to buy back shares while they are cheap like this."

 

In theory I would agree with you, but unfortunately I don't live in theory. If companies weren't robbing shareholder value blind through the liberal use of options it might work. But at best I find buybacks used to gloss over the dilution for no value and at worst used to hold price up while they exit. There are very few Berkshires out there and find that most insiders don't give a crap about the average shareholder. They want to pilfer as much value out of the company as they can without appearing too egregious. And what I've read about Biglari Holdings on here, it appears some don't even care about that. So if they have extra cash that they don't need for growing the business, give it back to me before they do something really stupid with it.

 

Sorry that's just the way I view most investments and it's worked well for me so far.

 

Came across this a few days ago also, along the same lines.

 

http://www.theglobeandmail.com/report-on-business/managing/board-games-2010/why-jarislowsky-thinks-stock-options-are-dangerous/article1830660/singlepage/#articlecontent

[Swizzled]

 

Petrobank/Petrominerales spin out complete. 

 

http://valueinvestorcanada.blogspot.com/2011/01/200-million-credit-agreement-for.html

 

Also Petrobank announces a $200mil credit agreement for funding Kerrobert, Dawson and May River.

[FFHWatcher]

Swizzled, Thanks for bringing up the Petrobank/Petrobakken/Petrominerales to my attention. Certainly an interesting company with interesting opportunities.  I find it 'out of the norm' that Petrobank went through with the dividend of Petrominerales shares to their shareholders vs. selling the shares into the market to raise cash for Petrobank directly.  It seems like an extremely shareholder friendly move, especially for a company like Petrobank who is not entirely self reliant on funding for their own aggressive growth and seems to have many, many growth opportunities that will require significant amounts of capital.

 

I read someone's comment that Petrobank must be very confident in their own corporate strength to be willing to 'give away' this $2.2B asset to shareholders, which seems to make the most sense in explaining this stock dividend.  I can certainly see the financial logic behind it, as Petrominerales can now be free to be seen as a much more independent company and it removes a level of complexity at the Petrobank level which generally leads to a market discount for Petrobank shares. Essentially, Petrobank feels that the companies combined value are worth more as separate entities vs. being held together within Petrobank.  I see that, I am just not used to seeing management giving up assets for the good of shareholder value, while, for an outsider at least, still feel that Petrobank on their own still has much capital to spend to realize their true value. 

 

The new $200M credit agreement further shows that Petrobank is planning to use significant capital in the near future.  Why not keep leverage lower, sell off 6-7M shares of Petrominerales to raise cash for a couple of years and then distribute the remaining shares to shareholders? I also see the effective tax treatment to Canadians for the stock dividend and the tax advantages of using debt to fund growth vs. selling off assets.  The only logical answer to that question is that Petrobank must be very, very confident in their own financial strength/prospects, including being confident that Petrobakken will continue to internally fund and pay it's dividend. 

 

Is there anything else that I am missing in this transaction, beyond extremely shareholder friends managers at Petrobank (who are also owners and founders if I am not mistaken) ?  For example, was their any sort of one-time financial rewards for managers that was buried deep in the proxy circular, or just plain old great management who stand beside, not above, all other shareholders?

 

 

 

[Swizzled]

"Is there anything else that I am missing in this transaction, beyond extremely shareholder friends managers at Petrobank (who are also owners and founders if I am not mistaken) ?  For example, was their any sort of one-time financial rewards for managers that was buried deep in the proxy circular, or just plain old great management who stand beside, not above, all other shareholders?"

 

FFHWatcher,

 

Thanks for the comments. 

 

I can't help you out much, because I agree with your conclusions.  I just think Petrobank has a guy running the business who understands the concept of maximizing shareholder value.  I've often heard him say that "we don't have any corporate jets at Petrobank....so we don't need to hang on to PMG to justify their existence"

 

Check out this interview with him on October 9, 2008.  Oil plummeting, everyone terrified.  His biggest concern was that they were in a reporting window and couldn't buy back shares.

 

http://valueinvestorcanada.blogspot.com/2011/01/interview-with-john-wright-during-late.html

 

Warmed my heart.  Not only the buyback part, but that he structured the company so that in a time like this they could profit from it, not die from it.

 

I mentioned PBG and all I ever hear back is THAI, THAI, THAI and how long it is taking.  THAI could be huge obviously, but Wright started this company with a $50mil market cap in 2000 and now has a $3bil PMG and a $4bil PBN before even considering THAI and the heavy oil unit.

 

Pretty amazing really.

 

[Myth465]

Linking to your Eric Nuttall link. The little guy knows his stuff.

 

http://valueinvestorcanada.blogspot.com/2011/01/my-man-eric-nuttall-on-bnn.html#comments

 

--

 

 

Yes, I was wonder what your thoughts were on his Petrobank, and Primary comments. I am guessing you agree on Primary, but not on Petrobank.

 

I plan to dig deeper into Novus and Westfire.

 

I really like him because he makes sense. He wants what I want. Good cash flow below 5x, and other hidden assets, reserves, or something to juice the returns. I also like his focus on production and his hatred of natural gas.

[Swizzled]

 

"Yes, I was wonder what your thoughts were on his Petrobank, and Primary comments."

 

I certainly agree with Primary.  I didn't own much of that and took the quick gain a while back.

 

I think his Petrobank comments are very telling of the mistake almost everyone makes.  All he talks about is THAI and the related assets.  He never mentions Petrobakken whose current mkt value makes up 95% of PBG's current mkt cap.  And I think Petrobakken is pretty clearly undervalued.

 

So if you figure Petrobakken's intrinsic value is roughly $27 that would make PBG's current mkt cap less than what its holdings of PBN are really worth.    THAI and the Heavy oil assets aren't the important part of this investment, they are the free option.

 

So how he gets a question on PBG's value and doesn't even mention PBN makes no sense to me.

[Swizzled]

 

Petrominerales with yet another successful exploration well of 10,000 barrels a day

 

http://valueinvestorcanada.blogspot.com/2011/01/petrominerales-scores-again-with-yatay.html

[roundball100]

Am looking at valuation of PBN vs. PBG, after the PMG spin-out.  PBN has continued trending down, now to C$20.70 after rising briefly at PMG's spin-out (calendar year-end).  What seems surprising to me: PBG is also trending down since then, today closing C$23.95 (up from an intraday 52-week low), mkt cap 2.5B (EV 3.6B), P/E ttm 12.59, P/E fwd (dec.31 2011) 8.43 and price/book 0.88 all per quick look at yahoo (quick look at globe and mail site lists P/E 11.4, fwd PE 8.48, price/book 0.53).  By either - assuming the real numbers are  ballpark correct - the P/E and price/book seem relatively low, and drastically lower since recalculated after the PMG spin-out.  If these number are correct, the valuation of PBG starts to look compelling (moreso than PBN, even without PBN's dividend which as a PBG shareholder instead goes to PBG as majority owner).  Does anyone see a different picture?

 

BTW, I assume the PBG discussion is better kept here on the PBN board, given PBG's ownership in PBN.

 

Also: a video link (in case not previously posted) from PBG web site, which I found informative explaining the toe-to-heel air injection (THAI) process aside from other (naturally upbeat marketing) info about PBG. 

 

http://www.petrobank.com/heavy-oil/thai-video/

 

[Swizzled]

"If these number are correct, the valuation of PBG starts to look compelling (moreso than PBN, even without PBN's dividend which as a PBG shareholder instead goes to PBG as majority owner).  Does anyone see a different picture?"

 

I think there is no question that PBG is the way to go.

 

Of the $2.4bil of PBG mkt cap $2.2bil is covered by the market value of the PBN shares they own.  You buy PBG and you are basically buying PBN with a bunch of potentially very valuable options kicked in for free.

 

I think intrinsic value of PBN is in the $27 to $30 range, so in my head you make money on PBG just from PBN alone.

 

The free options are 700 million barrels of recoverable SAGD oilsands oil.  The last two transactions on undeveloped oilsands were in the $1.20 to $140 per barrel range.  So that is $7 to $10 per PBG shares if they are simply sold and not developed.

 

The actual development plans are to ramp up production to 120,000 barrels per day.  The PV10 value under SAGD of these reserves is estimated as being over $3bil which is $30 per share.

 

However the plans are actually to develop these properties using their THAI technology under which there is actually 1.4 billion barrels of recoverable oil on those properties (a double) and it can be produced at about 25% of the cost of SAGD. 

 

And there is considerable potential for THAI licensing revenue at some point.

 

But the important part is ignore all of that huge upside if things work out and focus on what PBN is worth as that provides the downside protection here.

 

I think the market is basically paying me to take on the upside of the oilsands and THAI.  In other words I think you make money in PBG just because of the PB ownership.

 

I'm working hard to not get too excited on this one, but it is hard as there is a lot to like.

 

The companies presented at a Whistler conference this week, here is the link

 

http://valueinvestorcanada.blogspot.com/2011/01/whistler-conference.html

 

[roundball100]

Swizzled - thanks for the link to the Whistler conference.  The PBG presentation sure was positive ... I would have had more trouble believing it was credible if the CEO wasn't so over-the-top boring and understated.  Sounds very positive (of course, CEO's get into their present position by being able to see the positives ...).  Nonetheless, I find it a pretty convincing argument by an under-stated guy.  Now long, PBG.

 

 

[Swizzled]

 

The CEO John Wright (from what I've seen so far) is exceptional.

 

I'd recommend listening to the AGM from June of last summer.  It is on the Petrobank website.  Gives you a little more color on him and his business beliefs.

 

The founder of PBG asked Wright and team to take over PBG at the start of the decade.  Was a $50mil mkt cap at the time.  Now is PMG, PBN, the HBU and whatever THAI becomes.

 

The fact that he is willing to take the next step at Kerrobert is a pretty big deal to me.  He has built 2 other great units within this company and has no reason to push forward with THAI unless he believes it will be successful. 

[Myth465]

Are there cheap options available. I believe its a great idea, but lacks the leverage available in US stocks via leaps.

[Swizzled]

 

Don't know about the options.  Never looked.  Hate having time work against me so I generally avoid them.

[Myth465]

 

Don't know about the options.  Never looked.  Hate having time work against me so I generally avoid them.

 

Thats a good point, I think its a good beat with ATPG, but you are right on the Petrobank family. Petrobank really hasnt participated in the oil rally at all.