Petrobakken (PBKEF.PK) is a Canadian Oil and Gas exploration and production company focused on the prolific Bakken and Cardium plays. It pays a hefty 7.3% dividend and trades at extremely attractive multiples: 56% of risked Net Asset Value; 3.6X cash flow; and $21/barrel of reserves. Unlike many Canadian producers, Petrobakken is heavily weighted to oil, with only 12% of production in natural gas. As a result, it sports a $53/BOE operating netback, one of the best in Canada.
But I'm selling Petrobakken right now.
Why? Because I can buy Petrobank (OTCPK:PBEGF) instead. Each share of Petrobank owns 1.08 shares of Petrobakken, PLUS about $1.05 of net cash (it's currently debt-free). Petrobank owns some of its own oil properties, as well as patents for recovery technologies like the THAI process.
Let's put it all together as conservatively as we can:
- 1.08 Petrobakken shares = $14.15/share
- Net cash on balance sheet: $1.05/share
- Heavy oil properties valued on conventional basis: $0.75/share
- THAI process and other technology: $0 (we're being conservative)
That gives us $15.95 value for each share of Petrobank, a whopping 34% premium to its current price. Even if Petrobank's cash and other assets vanished into thin air, its Petrobakken holdings alone would be worth a 19% premium over its current price.
The Gift that Keeps Giving
Petrobank has tentatively planned to spin out Petrobakken shares to its own shareholders and is investigating tax-efficient methods to do this. That would give Petrobank shareholders an immediate bonus of about $2.00/share.
In the meantime, Petrobank subscribes all 108 million of its Petrobakken shares to the DRIP program. So when it receives the monthly dividend payment for July, Petrobank will own another 730,000 Petrobakken shares. This is especially relevant for U.S. Petrobakken shareholders who can't participate in Petrobakken's DRIP directly.
Petrobank has also instituted a novel buyback program, where it sells one share of Petrobakken and uses the proceeds to buy back one share of Petrobank. The arithmetic is extremely compelling: each time it does this, it nets $1 in cash. PLUS it actually increases the Petrobakken shares attributable to each Petrobank share (1.08 shares are redistributed among the remaining shares).
For example, if Petrobank sells 10 million Petrobakken shares and buys 10 million Petrobank shares, it nets $10 million in cash. The stake of each Petrobank's share in Petrobakken increases to 1.09 and its net cash increases to $1.27. As long as they can do this, I'm in no hurry for Petrobank to spin out Petrobakken shares.
Petrobakken is still a good value
So how does Petrobakken's value stack up to other companies in the Canadian E&P sector? A popular way to compare E&P valuations is the "flowing barrel" price -- the company's enterprise value divided by its barrels of oil equivalent (BOE) production (per day). This measure has limited value, because it includes natural gas production at a 6:1 ratio to oil. Because natural gas is actually priced at a 30:1 ratio, natural gas-weighted companies seem cheaper than they actually are. The other problem with the "flowing barrel metric" is that not oil production is alike. Heavy oil produced far from market centers isn't worth that much, where as light oil with near major markets is.
To compensate for the limitations of the flowing BOE metric, we divide it by the "netback" -- the sales price of a BOE less operating cost, royalties, and G&A. This gives us a single metric that measures the volume and the probability of each company's production.
On a simple flowing BOE basis, Penn West (NYSE:PWE) looks a lot cheaper than Petrobakken. However, Penn West produces a lot more gas, so its netback is much lower. Likewise, Baytex produces primarily heavy oil, so it has an anemic netback. Both of these companies look much more expensive than Petrobakken using the EV/BOE/Netback measure. Petrobakken is the bargain among this group. If you buy Petrobank you're getting those shares with an additional 34% discount.
Additional disclosure: I am long PBG.TO and short PBN.TO