According to one Calgary-based financier, China is still hot for Canadian Energy. In his latest exclusive interview on an online financial publication, Emerging Equities President James Hartwell says that several Chinese are eyeing resource assets in the Alberta oil patch and have already been in Canada to check out the scene for themselves.
He also believes that future takeover candidates might include Penn West Petroleum (NYSE:PWE) and Pengrowth Energy (NYSE:PGH), companies that could be swallowed up within the next 12 months. However, he also expects to see strong interest in smaller companies with market caps below $300 million, where Federal government approval would not be required in order to get deals done. In situations where target companies have market caps above the $300 million, Hartwell thinks the focus will be on conventional energy outside of the oil sands.
After all, he will be on his way to Beijing on May 5 to discuss specific opportunities that he hopes to advance dramatically on that trip, resulting in some successful Chinese deals. The thing is that the Chinese energy companies want to invest more in a stable country like Canada, and James Hartwell wants to facilitate their plans.
It is also worth noting that his company, Emerging Equities, still has a significant position in Surge Energy (ZPTAF.PK) which is one of my bullish bets and was analyzed here and here. I bought it below $4 and added when it dropped below $3, because Surge Energy is the most undervalued oil-weighted producer of North America, as I have explained in my articles.
The Asian Deals
Truth is that several major deals between Asian and Canadian energy companies have taken place lately. For instance:
1) In October 2011, Sinopec (NYSE:SHI) bought the unconventional natural gas producer Daylight Energy for more than $2 billion. Daylight's properties were located in Canada, targeting the shale oil and gas.
3) In late 2012, Malaysia's Petronas acquired Progress Energy, a natural gas weighted unconventional producer, holding a large position in the Montney shale gas play in British Columbia and Alberta.
4) In February 2013, CNOOC (NYSE:CEO) acquired Nexen, gaining access to a diversity of oil and natural gas producing properties. The Nexen acquisition gives CNOOC new offshore production as well as producing onshore properties in the Middle East. In Canada, CNOOC gained control of Nexen's Long Lake oil sands project in Alberta, conventional natural gas and coalbed methane producing assets, as well as billions of barrels of reserves in the world's third-largest crude storehouse, the oil sands in Alberta.
The thing now is: Are Penn West and Pengrowth truly attractive? Are they priced competitively to their peers? Let's check them out.
Penn West Petroleum
Penn West has exposure to a diversity of formations in USA and Canada (Spearfish, Slave Point, Cardium, Viking, Duvernay). Actually, with over 600,000 net acres across the trend, Penn West is the largest landholder in the Cardium and has also a 700,000 net acre position in the Viking. Penn West is also progressing on the three-well thermal pilot at Harmon Valley South which is expected to commence steam injection in the second half of 2013. The regulatory applications for the 10,000 bbl/d Seal Main Commercial Project were submitted in late 2012.
Penn West trades well below its book value (PBV=0.53) with an Enterprise Value of $7.5 billion currently. This gives $52,500/boepd and $16.85/boe of proved reserves. While the shareholders are waiting for the share price to rise, they also collect a lofty 11.5% dividend. The only negative is the D/CF ratio (annualized) which is at 2.96x and has to be improved. The company's huge acreage can easily fix it.
Furthermore, the company's annual 2013 average production guidance remains at 135,000 to 145,000 boe per day.
Pengrowth produces oil and gas from the Cardium formation and the Swan Hills Trend in Canada. The company also owns the Lindbergh thermal bitumen project (100% WI) which is going to be commercially operational (first phase) by year end. The development of the first phase of the Lindbergh thermal project is proceeding on time and on budget, with Alberta's Environmental Protection and Enhancement Act approval expected this summer. The first phase of Lindbergh commercial development is expected to reach 12,500 bbl/d of bitumen by early 2015. Two additional expansion phases are expected to increase total Lindbergh production to 50,000 bbl/d of bitumen by 2018. This is expected to be low cost, low decline, stable production, with a 25 year reserve life. The pilot performance continues to exceed expectations, with current production surpassing 1,700 bbl/d.
Pengrowth produced 89,700 boepd (~54% oil and liquids) in Q1 2013. and had 300 MMboe of proved reserves in December 2012.
Pengrowth's total long-term debt was approximately $1.63 billion as at March 31, 2013, comprising $1.4 billion of fixed rate term notes and $0.24 billion of convertible debentures.
The Enterprise Value is $4,2 billion, and Pengrowth trades at $46,800/boepd and $14/boe of proved reserves. It must be noted that Pengrowth also pays a hefty dividend of 9.3% annually.
Additionally, Pengrowth trades well below its book value (PBV=0.63) and has a D/CF ratio (annualized) at 2.75x.
Pengrowth used the proceeds of the recent Weyburn sale (~$316 million) to pay down its credit facilities, leaving the facilities undrawn at March 31, 2013, with $1.0 billion of available capacity. Pengrowth expects that the total debt by year end will not increase over 2012 debt levels, and the company will be able to fund its planned 2013 capital spending while maintaining the current dividend.
Moreover, Pengrowth is currently negotiating agreements worth $100 million to $125 million. The proceeds from these targeted sales are earmarked to support the 2014 funding of the first commercial phase of the Lindbergh thermal project and are not required to fund any capital expenditures or the dividend in 2013.
Estimated full year 2013 average production is expected to meet guidance which is 85,000 to 87,000 boepd.
Are Penn West and Pengrowth Really Cheap?
To answer this, let's check out the following companies:
1) Cabot Oil and Gas (NYSE:COG) is a heavily natural gas weighted company whose properties extend from the Marcellus Shale to the Eagle Ford shale in Texas.
As of Q1 2013, Cabot produces ~165,000 boepd (~94% natural gas) currently, although the company avoids mentioning the average daily production in its quarterly reports but makes the investor find it by himself. Why really? Does it want to hide something? Does it want to avoid being compared directly to the peers who report their daily production? Who knows.
Cabot has also 634 MMboe proved reserves (December 2012). This natural gas-weighted player has a net debt of $1.1 billion and an Enterprise Value at $15 billion currently. After all, Cabot trades at $90,000/boepd and $23.66/boe of proved reserves.
On top of that, Cabot trades well above its book value (PBV=7) although it pays a negligible dividend of 0.1% annually. The D/CF (annualized) ratio is 1.35x.
To me, Cabot is one of the most overvalued companies of the energy sector, and it is an excellent short candidate currently. Its key metrics are not justifiable by its fundamentals. This might also be the reason why Cabot avoids mentioning its daily production in its quarterly and annual reports. The direct comparison with the peers is not favorable to Cabot at all.
In North America, the company's primary producing assets are located in the Williston Basin (Bakken) and in South Texas (Eagle Ford Shale). EOG Resources produces 455,100 boepd (49% oil and liquids) and holds 1,811 MMboe proved reserves (December 2012).
With net debt at $5,4 billion and Enterprise Value at ~$38 billion, EOG trades at $83,500/boepd and $21/boe of proved reserves. Moreover, EOG trades at PBV=2.45 and gives a meagre dividend of 0.6% annually. The D/CF (annualized) ratio is 1.03x.
3) Laredo Petroleum (NYSE:LPI) has producing assets in the Permian and Anadarko Basins. Laredo produces 33,300 boepd (44% oil and liquids) and has proved reserves of 188.6 MMboe (52% oil) as of December 2012.
With Enterprise Value at $3,5 billion, Laredo trades at $105,100/boepd and $18.56/boe of proved reserves. Laredo also trades with a significant premium (PBV=2.6) and does not pay one single penny dividend. The D/CF (annualized) ratio is 3.18x which is obviously high.
After all, this is what we get:
The numbers always speak volumes. Eventually, I'll state the obvious. Both Penn West and Pengrowth are grossly undervalued in comparison to their US-based peers, holding also a lot of acreage prospective for oil and natural gas. It is not a coincidence that the majority of the recent deals in the energy sector target the Canadian companies. They offer the best value for money. As simple as that.
These two Canadian companies do not produce radioactive oil to be grossly undervalued. According to www.sproule.com, the spread between Edmonton and WTI has also narrowed significantly during the last months. Actually, the current spread is negligible and there was several periods during the last ten months when Edmonton surpassed WTI. After all, do your own due diligence and good luck.
Additional disclosure: I am also long Surge Energy (OTCPK:ZPTAF)