I need to drill a concept into my head. And that concept is that if there isn’t a flat out panic going on there is no sense even owning stocks. Because if you wait for six months chances are that there will be some sort of panic and you can buy whatever it is that you want to own for half the price or less.
You don’t ever know in advance where the panic is going to be. You just have to be willing to wade in and take advantage. In 2002 it was in technology companies, some of which could be bought for less than the cash on their balance sheets. In 2006 there was a panic in Canadian income trusts after a change in Canadian tax regulations. In 2008 and 2009 the panic was everywhere. And last summer the panic was around oil companies in the Gulf of Mexico. I bought a basket of those oil companies in June and July 2010 and sold them this March for large gains.
Those gains provided me with a large cash position at a time when there was no panic going on. I took my time and bought a portfolio of unconventional Canadian oil producers as they sold off in the second quarter. I thought I did pretty well buying slowly waiting for them to fall. Boy was I wrong. I should have waited for the Euro panic as all of these companies have been cut in half since I bought them.
I like the Canadian company Petrobakken (PBKEF.PK). I started buying the parent company when Petrobakken was around $20 per share. I’ve averaged down a few times as the stock price fell subsequently. What a mistake. I did all that buying when there wasn’t a panic going on. I should have waited for this Euro panic because the stock price is now under $7.
Here is the really amazing part to me.
In January of this year the stock price of Petrobakken was over $20 and the company was guiding for a 2011 exit production rate of between 46,000 to 49,000 barrels of oil equivalent per day.
As of an update provided this week, Petrobakken is under $7 and guiding for a 2011 exit production rate of 46,000 to 49,000 barrels per day.
Yes, exactly the same company providing exactly the same exit production guidance.
Actually check that. The company isn’t exactly the same, we now know that the company has assembled for very little cost 120,000 acres in four of Canada’s hottest emerging resource plays (Swan Hills, Nordegg, Duvernay, Montney). Yes, while the stock price has fallen from over $20 to under $7 Petrobakken’s asset value has actually increased.
What has changed of course is the level of fear in the financial world. Nine months ago people likely viewed the world as having high oil prices for the indefinite future. Today people think we are revisiting 2008, which of course had a collapse in oil prices and is a world in which any sort of financing is impossible.
The last 30% decline in Petrobakken can be attributed to an analyst report that created fear of a dividend cut due to a put option on convertible bonds that Petrobakken is facing on February 8, 2013.
Petrobakken has $750 million of convertible bonds that are due in 2016 but have a one-time “put option” where the bondholders can put the bonds back to Petrobakken. Petrobakken can repay the bonds through an issuance of equity or repay in cash. Because the stock price of Petrobakken is currently so depressed an equity issuance would be horribly dilutive.
So Petrobakken has to do something other than issue shares to make sure it can handle a $750 million repayment of these convertible notes 16 months from now. Here are the options that the company has on the table:
- Reduce the dividend being paid
- Reduced capital expenditures
- Renegotiate with the bondholders
- Find alternative financing
- Sell assets
- Find joint venture partners to share capital spending
- Increase production/cash flow
I read the analyst report that caused the most recent sell-off. I would say that it presented an accurate picture of the issues in front of Petrobakken. The report then assumed that Petrobakken is managed by a ham sandwich who is going to sit and do nothing and allow full repayment of the $750 million of bonds with stock at the current prices.
Call me crazy, but when a management team knows about an issue years in advance of it happening they do something to address it. Petrobakken management has known that the put option is coming for a long time already, and they are well down the road to taking care of it. I detailed the options available above, sitting on their hands and staring at the wall isn’t one of them.
Petrobakken has assets that oil companies want. Lots of them. 800 drilling locations in the Bakken. 1,000 drilling locations in the Cardium. High impact unconventional gas assets in Horn River and Monias. 120,000 contiguous acres in the Nordegg, Swan Hills, Duvernay and Montney plays. Conventional Mississippian properties in Saskatchewan.
I fully expected that we would see some sort of asset sale or joint venture on one of these properties. However, according to this
article the entire company may be on the block.
I certainly hope it isn’t because as a shareholder I was looking forward to the company developing its massive drilling inventory of light oil locations over the next 20 years. There is a lot of upside here that is not appreciated. To date Petrobakken has been able to book proven and probable reserves on the Bakken assets that assume only a 5% recovery of the original oil in place. Petrobakken’s nearest competitor Crescent Point Energy (CSCTF.PK) believes that a 30% recovery will be ultimately achieved from the Bakken. Petrobakken thinks 25% is more likely. Either way, that is at least five times as much oil being produced as current reserve reporting accounts for.
If the company is sold in the near future what is the likely price? The current share price is under $7. I know Petrobakken insiders thought the company undervalued at $20 because they were both buying back shares as a company and buying personally in the open market.
So the premium that Petrobakken would require would likely be pretty steep. That is why I would think sales of specific assets would be the more likely solution.
I’d be disappointed if Petrobakken were to be sold for $20 or less, but it wouldn’t be the end of the world. If you believe oil prices in the future are going to average $80 or higher then there are bargains a plenty that proceeds from a sale of Petrobakken could be redeployed into.
Now I need to get back to watching another panic unfold.
Disclosure: I am long PBKEF.PK.
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