PBN - Petrobakken

[Swizzled]

 

I'm the nimrod who first wrote about this way back when.

 

I spoke with the CEO last week and the CFO last night.  I've sent those interviews to my newsletter subscribers but I thought I should at least comment on this here.

 

The BMO report does an excellent job laying out all the issues facing the company.  And then it basically assumes that the management team is going to just drive directly into a wall in the road instead of acting to avoid that wall.

 

The 2013 put option isn't something that the analyst alerted Petrobakken management to.  They had been planning for it for quite some time and have a number of options that they are looking at.

 

The first of which is that they believe production will exit the year at 46k to 49k per day, while the BMO thinks next year will actually average below that.  That difference in production assumptions is over $150 million annualized, which basically is the dividend.

 

The part that I find most strange is that the stock sells off on news of a dividend cut.  If I were a shareholder of Petrobakken a dividend cut would be welcome as it would greatly reduce the risk of this investment.

 

The bottom line is that these guys need to hit their exit targets to regain some credibility.  They have 20 wells coming on each month for the rest of the year, and if you do the math on what these wells produce at reaching their exit rates should not be terribly difficult.

 

Full disclosure, I own this, I thought it was a good buy at $20, it is now $6.

[kevin4u2]

I'm the nimrod who Swizzled said didn't understand the assets.  I could really rub salt in the wounds but enough has already been said. 

 

Oct 23, 2010

 

http://canadianvalueinvesting.blogspot.com/2010/10/petrobank-energy-pbegf-terrible.html

 

April 10, 2011

 

http://canadianvalueinvesting.blogspot.com/2011/04/petrobakken-2010-annual-review.html

 

And more recently, Sept 28, 2011

 

http://canadianvalueinvesting.blogspot.com/2011/09/petrobakken-dividend-about-to-be.html

 

PBN has tanked recently.  Since they pay out 100% of earnings as dividend, where is the production growth going to come from?  Production may grow but it won't be increasing on a per share basis. 

 

Even though the CEO said in the papers that the dividend isn't going to be cut, mark my words...  It will get cut. 

 

The bank may end up owning this one. 

 

 

 

Regards,

 

Kevin

[Ross812]

Swizzled,

 

I poked around in the 13 September Presentation.

 

http://www.petrobakken.com/wp-content/uploads/2011/09/PBN-2011-09-13-Corp-Pres-with-Appendices.pdf

 

It states an aggregate 40% decline rate for 2011 wells due to high decline in the first year on newly drilled wells (pg 8 ). If they hit 46k per day. Cost per barrel of oil $26.11/boe (pg 28). I have 13.44 million barrels extracted in 2012 assuming the 40% decline rate (current well output of 27.6k bpd Jan 1 2013). Another 20% decline in oil prices gives a price of $64 per barrel meaning aggregate netbacks are $37.89/boe. Cash flow based on current operations and $64 oil for 2012 $509 million. At $80 oil its 724 million.

 

Capex for 2011E was 900 million (pg 8 ). Dividend is 177 million. Cost to carry the debt on the 750 million convertibles at 3.125% they need 25.53 million (not 3.125% but pg. 7 of Annual Report). The amount of 26.11/boe says it includes the costs of developing the well. I’m not sure how to handle this, maybe break drilling out of Capex? Capex excluding wells drilled for 2011 was 215 million (pg 8 ). I’m not sure what interest rate to apply to the $1.14 billion in the 3-yr credit facility (pg 8 ), from the 2010 Annual Report http://www.petrobakken.com/wp-content/uploads/2011/03/PBN-2010-YEResults-Web.pdf  (pg 7) I’m getting roughly 5.5% so the 1.14 billion credit facility will cost them $62.7 million.

 

So for fixed costs before drilling I’m getting:

Dividend 177 million, convertible 25.53 million, credit facility 62.7 million, and capex excluding drilling 215 million; this is a total of 480 million. The big IF is how the other 685 million of capex is paid for out of revenue. 

 

If all goes according to plan in 2012 and they can drill as they did this year exit rates should be 5000-6000 higher than 2011 around 52k bpd with average daily rates of 49k bpd. Meaning cash flow will be between 677-963 million based on (64-80 oil).

 

The convertible notes due in 2013 could be a huge problem… Even if oil stays high they will not be able to cover 750 million. I could however see a scenario where they cut 75 million out of the dividend and issue 750 million in debt at 10% to push the debt out further.

 

On a better note: decline rates should be 33% next year (pg 5 of the presentation) and appear to keep decreasing each year after meaning further drilling will increase capacity more than these early years.

 

If anyone know how to account for this Capex please share. I’m in over my head hear on trying to figure out what is going on with the Capex. 

 

[Ross812]

kevin,

 

This forum is not yahoo finance, or stock house. If you want to post an "I told you so" go there. I agree with you that the dividend may be reduced but the dividend is not 100% of earnings. I read your blog and you seem pretty sharp. How does the capex figure into the balance sheet?

 

 

[kevin4u2]

Ross,

 

I appolgize that my comments being like that.  If you look back at our debate I was thoroughly insulted over and over.  I attempted to debate facts and still am being told I missed a bunch of assets. 

 

As for your analysis above, I would take that presentation from the company and burn it.  Secondly, the 2P finding and development cost you quoted being $26.11 is not reasonable.  Last year Proved Developed Producing reserves (the ones actually on production) cost $64/boe.  I wouldn't take that number in isolation but the three year average Proven finding and development cost is just south of $50/boe.  I would use that number, not the grossly misleading $26.11/boe. 

 

How does capex figure into the balance sheet.  All capitalized expenditures get added to PP&E and depreciation is deducted.  Some G&A may also be capitalized. 

 

Lastly, as I have to go, the dividend is around 100% of earnings.  In 2010 it was 101% of earnings and year to date it is 84%.  Moreover the company may have to realize some accelerated depreciation shortly due to poor performance.  You see under canadian GAAP the DD&A was calculated using proven reserves and under IFRS depreciation is calculated using the more estimate driven Proven plus probable (2P) reserves.  Their drilling result have been poor and if they have to write down reserves it will flow through the income statement as accelerated DD&A.  I would say it's only a matter of time given the proven reserves cost closer to $50/boe and the are using the often management inflated 2P numbers. 

 

I am very pessimistic on oil and commodities in general. 

 

I would strongly suggest using proven developed producing reserves when evaluating finding costs (or proven reserves at a minimum).  It's funny how PBN's 2P finding and development costs are always around $30 yet once they get those probably reserves actually producing it ends up costing $50.  Hmmm... something to consider. 

 

Listen Calgary is a small town and news travels fast.  When PBN drops over 20% in a day it wasn't based on nothing.  If you look back during the income trust era, nearly every company that was acquired saw it's stock run up (sometimes agressively) before the announcement.  It's almost a joke.  Too bad the small guy get's screwed.

[Ross812]

43,000 boepd hit at the end of September

 

3 October 2011 press release:

 

http://www.reuters.com/article/2011/10/03/idUS108821+03-Oct-2011+MW20111003

[Myth465]

It seems like this is the big worry. They will have to do something about it. Paying these off in shares would really suck for share holders ......

 

The debentures have a one-time, one-day

early put option on February 8, 2013 that allows those holders that elect

to exercise the option to request payment in full for their debentures.

In the event that holders request payment, PetroBakken has the option to

repay in cash or through the issuance of PetroBakken shares based on the

then current share price.

[Ross812]

Myth,

 

I don't see why PBN wouldn't be able to renegotiate the convertibles or issue a new debt offering. Even a 9.5% preferred similar to Seaspan's recent offering would prevent a dilution. Such a debt offering would increase their debt load by ~50 million a year. I think it is important to remember Petrobank depends on Petrobakken for cashflow and the business model is such that Petrobakken funds Petrobank's activities via the dividend. Petrobank would lose majority ownership of Petrobakken if a 40% dilution takes place (it would go from 59% to 41%) and Petrobank's cashflow would take a 25% hit so I believe a dilution would be last resort for management. 

[Myth465]

True but its all timing. Who is to say markets will be open to new debt when the time comes. If it isnt then they will have to issue shares under $10. Its a scary situation looming, which is probably best tackled now  or in the first 6 months of 2012.

[Ross812]

Agreed Myth. It is a tough situation but the parent company being the majority shareholder aligns management with common shareholders.

[Ross812]

I took a look at Petrobakken’s cashflow statement for Q2 2011. For the six months ending June 30, 2011 Cash flow from operations was 329.113 million. Investing Activities: (548.52 million) including the charge for expenditures on property, plant, and equipment of (391.227 million). Financing Activities: 312.98 million borrowed from their credit facility – 89.812 for dividends - 3.765 million in other costs for 219.407 million total. For the first half of the year Petrobakken borrowed 312.98 million and made 329.98 million (total 642 million); they distributed 89.812 million and spent 548.52 million getting all their new land ready to go (total expenses 89.812+548.52+3.765 = 642 million). So they actually had no free cash flow; in fact they borrowed 312 million dollars to finance the dividend and operations for the first six months.

 

I hoped the 391.227 million charge for expenditures on property, plant, and equipment were front loaded but the September presentation states the majority of capex wll be spent in Q3 and Q4. In 2010 248.416 million was spent in Q1-Q2 Capex on property, plant, and equiptment; and 563.455 million was spent in quarters 3 and 4.

 

I’m in this at an average $16.50 so I’m with you on this. Even if they do 850 million in cash flow from operations this year (as their recent letter states) how are they going to repay a 750 million dollars without asset sales and a dividend cut? 850- 329 Q1 and Q2 = 521 million which they will owe 90 million in dividend and Capex of what? 548 million as in Q1 Q2 2011? 563 million spent in Q3 Q4 2010? Not only can they not pay the dividend but they cannot pay capex from their current cash flow.

 

What do they own that you believe can be sold for 750 million? On a bright note, Goldman estimates crude at $120 for 2012 with the spread moving from the $20’s down to an average of $13 for the year. The exit Spread should be $6. I assume this means if Goldman is correct, Petrobakken should be able to sell oil for an average of ~$107 next year…

[Myth465]

The model has always been slightly off. PBN would be better off paying out 10% cash flow and using 90% for drilling. They however have to feed Petrobank. They should find a way to separate the two companies, and Petrobank needs some reoccurring cash of its own.

[Ross812]

Attached is a ballpark estimate of their free cash flow assuming an $85/barrel average price for 2012 ($58 net back) and beyond.

 

I've been looking at a blended approach to the $750 million put coming due.

 

Petrobank owns 59% of Petrobakken so the max the parent would want to dilute PBN.TO to is 50%. They could sell 33.84 million shares and maintain a majority control of the subsidiary. The debt load on the 750 million due is 23.4 million.

 

Sell 33.84 million shares at $7 for 236 million

Maintain the 23.4 million debt load by issuing 246 million in debt at 9.5%

Maintain production at 46,000 bpd which will cut CAPEX from 900 million to 716 million. Cut the dividend. Yielding 257 million in FCF. Management gets no incentive shares or options next year 20 million

 

Total = 759 million

 

This solution maintains the debt load and production. With the decreasing decline rate, PBN will produce 974 million in Operating cashflow in 2013 with a CAPEX of 590 million to maitain production. This means they will produce 384 million in FCF and resume 10% production growth. At the decline rate it should cost 850 million in CAPEX which leaves 124 million in FCF for the dividend. After 2013, the dividend could grow at 2014 37%, 2015 26%, 2016 19%, 2017 10%, 2018 10%, 2019 10%. This is of coarse a scenario that assumes $85 oil, production targets being hit, and all FCF payed as dividends.

 

2013 dividend asuming 33.84 million dilution: $0.55 yr/share 8.4% at the current share price

2014 $0.75/yr

2015 $0.94/yr

2016 $1.09/yr

2017 $1.20/yr....

 

 

[naboo]

it seems not many people here like PBN/PBG.

 

 

PBN  reached 47500 bopd 2011/10, hope PBG's  THAI could give us some surprise

 

http://www.petrobakken.com/wp-content/uploads/2011/11/PBN-2011-11-08-Q3-Full-Report-FINAL.pdf

[tyska]

"Nov 16 (Reuters) - Enbridge Inc surged past its competitors in the race to send large volumes of oil locked up in the U.S. midcontinent to the giant Gulf Coast refining hub after the $1.15 billion acquisition of ConocoPhillip's Seaway pipeline.

 

Enbridge and Enterprise Products Partners , which owns the other 50 percent of the 350,000 barrel-per-day Seaway pipeline, said on Wednesday they plan to reverse the pipeline that currently moves oil from the U.S. Gulf Coast to the oil storage hub at Cushing, Oklahoma.

 

Reversing the pipeline will increase the flow of crude from Cushing, the delivery point of the New York Mercantile Exchange's oil futures contract, to the Gulf Coast.

 

The reversed line could be in service at an initial capacity of 150,000 bpd by the second quarter of 2012, Enbridge said. Station additions and modifications needed to ramp up flow rates to 400,000 bpd will be completed by early 2013."

 

http://www.reuters.com/article/2011/11/16/conocophillips-idUSN1E7AF0BQ20111116

 

Should be good news for all the bakken plays, price wise for product.

[Ross812]

The $750 million bonds are being rolled forward to 2020.

 

http://www.petrobakken.com/news-releases/petrobakken-announces-proposed-us750-million-offering-of-senior-unsecured-notes/

[Ross812]

PetroBakken to sell non-core Saskatchewan assets for C $105 million.

 

http://www.reuters.com/article/2012/01/19/petrobakkenenergy-idUSL3E8CJ59F20120119?feedType=RSS&feedName=mergersNews&rpc=43

[gordoffh]

What a move this stock has had - I have just over 5 k shares buying from 13 to just under 7 - back when it was in the low 7's I considered putting some of my probably too many SD shares into this , they were trading at around the same price plus the dividend - shouda coulda wouldhave - not complaining just saying

[roundball100]

Reading the Letter to Shareholders from John Wright (March 25, 2012 - I am working from hardcopy, but presumably also on their corporate site), the external view they are projecting continues to be high confidence in the THAI process (toe-to-heel-air-injection).  It seems you either believe in Wright and his team, or not.  Agreed the market seems to move the share price with great gusto both ways.

[roundball100]

Correction to my previous comment - that was about Petrobank Energy (PBG.TO) rather than PBN per se, as those familiar with PBG/PBN would have guessed. 

[Ross812]

At this point Thai is free. Pbn trading at a discount to petrobakken. I made a few spread sheets to model the growth rate with with decline rate from the wells. 50mbpd means they are a little ahead of sdchedule and should actually through off some fcf. Petrobank has heavy oil assets in developement; they keep pumping money ifrom the petrobakken divi nto Thai; and have 1.03 shares of petrobakken per share (off the top of my head). They are definently risky, in that a delay in drilling new wells can lead to a 30-40% decline rate in one year right now, but they are right on the cusp of rapidly reducing the decline rate as wells mature. Obviously when this happens share price should increase significantly.

[Ross812]

I don’t know if anyone still owns Petrobank like me but I’ve been waiting for the spinoff of Petrobakken for some time now. I just saw the news when I checked my account today. Petrobank shares have been trading at a 10% discount to Petrobakken shares for almost a year now. Holders of Petrobank will receive 1.08 Petrobakken shares and 1 ‘New’ Petrobank share for each old share they own. The new Petrobank shares should trade for at least the $1 cash they have on the balance sheet.

 

[Alekbaylee]

Is this really yielding 10% now??? Any reason for that?

[plato1976]

Actually it's yielding 13% now, :)

I bet ppl must think this corp as a crap

 

Is this really yielding 10% now??? Any reason for that?

[Myth465]

Many think too much debt, too much capex, and that the dividend needs to be cut.

I hold, and agree with Wright, the dividend is a small part of cash flow. Will be interesting to watch, they will have to do something soon.