PBG.TO - Petrobank

[txitxo]

I had a look at this company because it is a net-net. Although my forte is statistical investing, this seems intriguing.

 

On June 30th they had 70M net working capital with no debt, and >40M in oil in the ground. The current market cap is  33.6M. The obvious reason is that they are burning money very fast (40M per year) trying to get their THAI technology, a new method to extract heavy oil, to become profitable, so by the end of the year they expect to have only 52M in cash. They have been peddling THAI for years, but the thing just does not work as advertised, so everybody is sick of hearing about it and value the technology at zero.

 

I see three scenarios here.

 

a) The CEO, John D. Wright, is trying to prove at all costs that THAI works, so he will burn through all the cash in the company, after that sell the oil reserves, burn that cash too, and then he will smear himself with heavy oil and self-immolate 

 

b) He will try to "steward the capital" as they promise in their report, probably spend all the cash but at some point he will just give up, sell the lands, liquidate the company and return the money to shareholders. In that scenario there probably would be a moderate gain from the current share price.

 

c) Management knows, or suspects, that the problems with THAI are fixable, in which case the stock would be a rocket and they are bidding their time, buying more land while it is cheap, and decreasing the share count (a bit like Eddie Lampert seems to be doing with SHLD). That is supported by the fact that they plan to buy 10% of the stock during the next year, something which would not fit well with a). 

 

  Another factor to consider is that Orbis had a large position in the company (at least the last time it was reported). But the price has been going down hard recently, so they may be selling.

 

  It is obviously difficult to calculate probabilities for each of the scenarios, but even if a) is let's say, 10%, and c) is only a few percent, the value of the company should be quite higher that the current price.

 

  Is there anybody around knowledgeable about Canadian oil companies? Any insights?

 

 

 

 

 

 

 

 

[twacowfca]

I had a look at this company because it is a net-net. Although my forte is statistical investing, this seems intriguing.

 

On June 30th they had 70M net working capital with no debt, and >40M in oil in the ground. The current market cap is  33.6M. The obvious reason is that they are burning money very fast (40M per year) trying to get their THAI technology, a new method to extract heavy oil, to become profitable, so by the end of the year they expect to have only 52M in cash. They have been peddling THAI for years, but the thing just does not work as advertised, so everybody is sick of hearing about it and value the technology at zero.

 

I see three scenarios here.

 

a) The CEO, John D. Wright, is trying to prove at all costs that THAI works, so he will burn through all the cash in the company, after that sell the oil reserves, burn that cash too, and then he will smear himself with heavy oil and self-immolate 

 

b) He will try to "steward the capital" as they promise in their report, probably spend all the cash but at some point he will just give up, sell the lands, liquidate the company and return the money to shareholders. In that scenario there probably would be a moderate gain from the current share price.

 

c) Management knows, or suspects, that the problems with THAI are fixable, in which case the stock would be a rocket and they are bidding their time, buying more land while it is cheap, and decreasing the share count (a bit like Eddie Lampert seems to be doing with SHLD). That is supported by the fact that they plan to buy 10% of the stock during the next year, something which would not fit well with a). 

 

  Another factor to consider is that Orbis had a large position in the company (at least the last time it was reported). But the price has been going down hard recently, so they may be selling.

 

  It is obviously difficult to calculate probabilities for each of the scenarios, but even if a) is let's say, 10%, and c) is only a few percent, the value of the company should be quite higher that the current price.

 

  Is there anybody around knowledgeable about Canadian oil companies? Any insights?

 

Petrobank is certainly interesting as a debt free net net, but that's about it. Their Thai wells are in bad shape with the burn going down into the drain holes.  It's possible that their pumping water down the wells could be helpful, but that's a long shot, given that their process is experimental and hasn't worked well no matter what they have tried.

 

Their capital management stinks. They put half their cash into stock and debt of Lightstream Resources their sister company from which they were spun off.  That company is hitting new lows because they need more capital to keep drilling, but they probably won't get it unless the price of oil heads north.

 

Hopefully, they will come to their senses and stop tinkering with their failed process and conserve their assets.  However, their history does not inspire much confidence that they will do this.

 

There is one question I can't answer: if they put Thai in mothballs, will they lose the rights to their leases for non performance? Or will they have to make payments to maintain those rights?  This may be a critical question for valuation.  Can our astute board members who know a lot about the Canadian oil industry shed light on this?

[txitxo]

Petrobank is certainly interesting as a debt free net net, but that's about it. Their Thai wells are in bad shape with the burn going down into the drain holes.  It's possible that their pumping water down the wells could be helpful, but that's a long shot, given that their process is experimental and hasn't worked well no matter what they have tried.

 

Their capital management stinks. They put half their cash into stock and debt of Lightstream Resources their sister company from which they were spun off.  That company is hitting new lows because they need more capital to keep drilling, but they probably won't get it unless the price of oil heads north.

 

Hopefully, they will come to their senses and stop tinkering with their failed process and conserve their assets.  However, their history does not inspire much confidence that they will do this.

 

There is one question I can't answer: if they put Thai in mothballs, will they lose the rights to their leases for non performance? Or will they have to make payments to maintain those rights?  This may be a critical question for valuation.  Can our astute board members who know a lot about the Canadian oil industry shed light on this?

 

  Well, it seems as if the CEO has read your posting. They will stop working in THAI after June 30th 2014 if it does not become profitable by then. They also mention that they are already using SAGD and that they will try it at more locations so it does not seem as if they are in risk of losing their leases.

 

  Even if they keep burning cash at the current rate until June 2014 (10M$/Q) they should be cash flow positive by then, have 30M$ in net working capital and >40M$ in assets, or about 0.70$/share. Current share price is about 1/2 that. 

 

http://finance.yahoo.com/news/petrobank-reports-q3-2013-financial-002212420.html

 

http://www.calgaryherald.com/business/Petrobank+puts+deadline+THAI+technology/9161548/story.html