In a previous article, I described how Petrobank (OTCPK:PBEGF) was trading at a substantial, irrational discount to its Petrobakken (PBKEF.PK) subsidiary. Each share of Petrobank owns nearly 1.1 shares of Petrobakken, yet Petrobank was selling for nearly $1.50 less than Petrobakken. A month later, I noted how the price disparity had narrowed but was still much larger than it ought to be.
With Petrobank's announcement after the Canadian market close on Monday, it looks like the Petrobank/Petrobakken price disparity will finally be eliminated entirely. Those who have been long Petrobank and short Petrobakken will be rewarded for their patience.
In this announcement, Petrobank declared that:
- It will create two independent companies, "New Petrobank" (or just "Petrobank") and "New Petrobakken" (or Petrobakken Energy Ltd.).
- Current Petrobakken holders will receive one share of "New Petrobakken" for each current share of Petrobakken.
- Current Petrobank shareholders will receive one share of "New Petrobank."
- Current Petrobank shareholders will also receive shares of "New Petrobakken" at the "exchange ratio," which will be somewhere between 1.06 and 1.10 shares of New Petrobakken shares for each Petrobank share.
Considering that the "New Petrobank" will hold $100 million in net cash (about $1 per share), plus heavy oil assets and a patent portfolio, we expect it will trade somewhere between $1 and $2.50. Based on Petrobakken's closing price of $12.38, Petrobank shareholders will also receive about $13-13.60 worth of Petrobakken shares. Put together, that adds up to about $2-2.50 more than Petrobank's recent closing price.
Of course, this assumes that Petrobakken shares will not drop on the announcement. We expect that they will drop a bit and I will use that as an opportunity to cover my short position. Many Canadian hedge funds have also been short, so that may mitigate the price drops. It's important to note that the release of the Petrobank shares is not a dilutive event, it's just an unlocking of existing shares. As I've outlined before, Petrobakken remains a good value in its own right. If it goes lower, I may even buy some to supplement the shares I'm getting in the conversion.