I wrote an article a couple of months ago about Canadian unconventional light oil producer Petrobakken (PBKEF.PK) in which I questioned the thought process of the analysts covering the company.
Here was what I said at that time:
Recently, I've observed something very interesting with respect to the analysts that cover the company. And what I've observed is that the analyst target prices don't make any sense.
Consider the following variables at two points in time:
Nov 2010 Petrobakken Production - 40,000 boe/day
· Production Guidance for Dec 31, 2012 - 46,000 to 49,000 boe/day
· WTI Oil Price - $85
· Range of Analyst Price Targets for Petrobakken - $21 to $30
· Actual Petrobakken Stock Price - $20.00
· Nov 2011 Petrobakken Production - 47,500 boe/day
· Production Guidance for Dec 31, 2012 - Over 49,000 boe/day
· WTI Oil Price - $99
· Range of Analyst Price Targets for Petrobakken - $7 to $21
· Actual Petrobakken Stock Price - $9.50
Let me summarize that, because it doesn't make a whole lot of sense to me.
· Production up from 40,000 boe/day to 47,500 boe/day
· Petrobakken is going to exceed their high end 2012 exit rate production targets from a year ago
· WTI Oil prices are up from $85 to almost $100.
Despite production rising 20% (as well as exceeding even the most optimistic estimates) and oil prices rising 18% analysts have cut their target stock prices almost in half on average."
This week Petrobakken provided an operational update for shareholders that was a continuation of a very positive trend.
Here are the key points:
- Production average over 50,000 barrels per day (87% oil) in December, far exceeding the expected 46,000 to 49,000 range that was targeted at the beginning of 2011
- Production from the Bakken play was over 23,400 barrels per day
- Production from the Cardium play was over 16,500 barrels per day
- Petrobakken expects 2012 production growth to be 15% year on year
With Petrobakken's share price near $14 the company still yields almost 7%. But it isn't the yield that gets my attention, it is the growth in production, cash flow and dividend payments that this company has in front of it over the next five years.
Petrobakken is a virtually pure play on unconventional oil and liquids production.
What we have known for the last year is that Petrobakken has a large inventory of drilling locations in the Bakken and the Cardium. According to Petrobakken the numbers are 750 locations in the Bakken and 650 locations in the Cardium.
What Petrobakken has kept pretty quiet about and what it is now slowly starting to talk about are the four new light oil and liquids plays the company has built acreage positions in over the past couple of years.
The four plays are:
- Swan Hills
- Montney (oil play)
In the operating release Petrobakken indicates that there have been two wells tested in these plays (by Petrobakken) and the results indicate commercial levels of production. The company has also indicated that it has assembled 120,000 acres in these plays.
What is almost impossible to figure out is what the ultimate size of these new plays is going to be. Petrobakken is saying very little other than that it has 120,000 acres and that the first two well tests have confirmed the economics of at least some of this acreage.
At the current rate the company is drilling it has over a decade of drilling locations excluding these new plays. What I want to know is how big that drilling inventory is going to be once we get a full look at these top secret plays?
It is a question that as an investor I can't answer at this point. What excites me is that Petrobakken was assembling this land package as far back as two years ago, which was before these plays got hot, which means this land was acquired on the cheap.
When I invested in Petrobank (OTCPK:PBEGF) in 2010 (the parent of Petrobakken) I did so in large part because I have great admiration for this management team. Don't get me wrong, I invested because I thought the valuation was very attractive as well. But a big part of my investment was because I believed that this management team would continue to do "smart things" and create additional value for me.
The root of my belief in the management team is its documented history. In the year 2000 the current management team took over Petrobank, which had a $1 stock price, a $40 million market capitalization and a few natural gas assets. Fast forward 10 years and this management team had turned a tiny natural gas producer into three oil producers with combined production of more than 80,000 barrels a day and market capitalizations in the billions.
Management did more than a few "smart things."
These four new resource plays are going to be another one of those "smart things" that management has done that will materially increase the value of the shares I own. Over the next 12 to 18 months investors are going to slowly learn more about these new plays and the value of the plays will eventually start to be reflected in Petrobakken's share price.
I'm anxious to learn more about these plays, but as far as I'm concerned the longer management stays quiet about them the better. If management isn't talking, it means it is likely adding more land and more value.