I'm not the sharpest knife in the drawer, but I've always thought that I have been blessed with my fair share of common sense.
Over the past year as I've held shares of Petrobank (PBEGF.PK) and subsidiary Petrobakken (PBKEF.PK) I've wondered more than a few times if I'd overestimated just how much common sense I actually have. Because the analysts covering Petrobakken were seeing something much different than I was.
Consider the following variables at two points in time which I looked at back in November for Seeking Alpha:
- Nov 2010 Petrobakken Production - 40,000 boe/day
- Production Guidance for Dec 31, 2011 - 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, 2011 - Over 50,000 boe/day
- WTI Oil Price - $99
- Range of Analyst Price Targets for Petrobakken - $7 to $21
- Actual Petrobakken Stock Price - $9.50
- Production up from 40,000 boe/day to 47,500 boe/day
- Petrobakken is going to exceed their high end 2011 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.
But it is even more confusing than that makes it seem. In addition to exceeding their most optimistic production targets the company announced that over the past 8 quarters they have assembled 120,000 acres in four emerging light oil plays (Swan Hills, Duvernay, Montney and Nordegg) at very low costs per acre.
Now, it seems to me that when production is better than expected, oil prices are higher than expected and the company asset base is much larger than expected, the average target price should increase -- not decrease by 50%. Did Petrobakken issue any shares in 2011 that might account for this reduction in value per share estimates by analysts? Not a single one.
Balance Sheet Cleanup Provides Valuation Help
Since November Petrobakken shares have risen to over $15 and analysts have started increasing their targets. Isn't it interesting how in most cases the share price leads the analyst, rather than the analyst leading the share price?
What has helped the stock market start to show Petrobakken a little more love is steps the company has taken to improve its balance sheet. Two of those steps have involved small dispositions of producing properties.
Disposition #1 - Sale of Petrobakken's interest in a Weyburn oil property
- Proceeds - $105 million
- Production - 580 barrels per day
- Price Per Flowing Barrel - $181,000
- Multiple of Cash Flow - 9 times
Disposition #2 - Sale of non-operating Bakken property
- Proceeds - $427 million
- Production - 2,900 barrels per day
- Price Per Flowing Barrel - $147,250
- Multiple of Cash Flow - 7 times
On average, these two transactions took place at $164,000 per flowing barrel, 8 times cash flow and $31.50 per barrel of proven and probable reserves.
If I apply these multiples to the entire company, I get the following estimates of enterprise value:
Exit 2011 Production: 50,500 x $164,000 = Enterprise value of $8.3 billion
Estimated 2012 Cash Flow: $1 billion x 8 times = Enterprise value of $8.0 billion
Valuation is not an exact science, but both of these numbers point to an enterprise value of over $8 billion, which likely isn't too far off the mark. With an $8 billion Enterprise Value and $1.6 billion in debt, Petrobakken would have a market capitalization of $6.4 billion. That would point to a share price of $6.4 billion / 187 million shares = $34.22 per share.
As I mentioned, valuation is not an exact science, but I do think that these recent transactions are quite useful in assessing what Petrobakken might be worth. I find it hard to imagine lower multiples of production and cash flow would be appropriate for the entire company than were used in these deals. That is because Petrobakken has several large positions in the Horn River, Montney, Nordegg, Duvernay, and Swan Hills, which are as yet undeveloped and would not be assigned any value on a multiple of production or cash flow basis.
After looking at the valuation signals from these deals, my opinion of Petrobakken is unchanged. It provides a very nice yield, is considerably undervalued relative to its asset value and is run by a very good management team.
Disclosure: I am long PBKEF.PK, PBEGF.PK.