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Devon Shire
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Author of the value investing newsletter detailing the formation of the "Punch Card Portfolio" (http://valueinvestorcanada.blogspot.com/). Devon Shire is an accountant and an investor with 15 years experience managing a private portfolio. Devon Shire's preferred portfolio management... More
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Canadian Value Investing
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Canadian Value Investor
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CVI - Punch Card Portfolio
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  • Petrobank Q3 - THAI Starting to Look Very Valuable (You get it for free at the current stock price)
    On October 20, 2010 I wrote about a company called Petrobank and referred to it as being an “exceptional risk/reward scenario”. The original article and some others related to Petrobank can be found via the link below:

    http://valueinvestorcanada.blogspot.com/search/label/PBG

    My basic thesis is that if you buy a share of Petrobank you pay only for the market value of its two publicly traded subsidiaries Petrobakken and Petrominerales. In my mind that means you pay nothing for three valuable things:

    1) The upside in the Petrobakken and Petrominerales shares that I believe the market will eventually realize. Both companies can be purchased today for reasonable cash flow multiples and you get exposure to vast acreage that both have locked down. In other words there is a lot of growth in cash flow coming for each in the next decade which should drive their share prices higher.

    2) Almost 700 million barrels of heavy oil and oil sands reserves in the parent company

    3) The rights to a technology called THAI which Petrobank claims and its reserve auditors have verified as being a step change in heavy oil and oil sands development technology.

    In my mind I was happy to buy Petrobank just for the exposure to Petrobakken and Petrominerales which alone should result in a decent return from current prices. Anything above that from the Heavy Oil Business Unit and THAI was a free option in my mind.

    Since I wrote Petrobank had already announced one significant event that will help shareholders realize value as they will be spinning out all shares of Petrominerales to shareholders on December 31, 2010. This should help eliminate some of the parentco discount that currently exists.

    I believe even better news was delivered today through Petrobank’s Q3 earnings release and conference call as the Heavy Oil Unit and THAI free options that I mentioned are now looking as though they are very valuable.

    What did we learn today that has me excited ?

    1) The THAI wells at Petrobank’s Kerrobert pilot facility have now reached a level of production that will result in their reserve auditors booking THAI reserves for year end 2010. This is significant because this is confirmation of the success of the THAI process which is a huge step forward for heavy oil / oil sands production. I’ll try and explain the value of this to Petrobank a little later.

    2) Petrobank expects that they will sign two licenses to use THAI with International Oil companies before the end of this year. This is further confirmation of the THAI process and it is expected that these licenses will result in Petrobank receiving a royalty on production and/or a share of the reserves upon which THAI will be applied.

    3) Petrobank has started drilling a 10 well expansion at Kerrobert which means that THAI is no longer just being tested, but is ready for commercial development.

    4) Petrobank has received approval to go forward with its Dawson development in 2011 and its reserve auditors are now estimating Dawson has 200 million instead of 100 million barrels of oil in place.

    5) The THAI process is exceeding expectations in the amount it is upgrading the oil in place that it is producing. That native reservoir API at Kerrobert is 10.3%, and the oil that THAI is producing is over 18% and approaching pipeline quality. This obviously is much more economical that conventional heavy oil production which requires expensive dilutants.

    Ok, so they have reached the steady state of production they needed, it looks like THAI works and they get to book THAI reserves. So what ?

    When I made Petrobank a significant position in August of this year I did it with the idea that I had no idea whether or not THAI was going to work. I thought that this investment in the worst outcome possible (THAI not working) was likely not going to lose me very much money and actually likely turn out to be a decent investment because Petrobakken and Petrominerales are both worth more in my mind than I was paying for them by buying a share of Petrobank. In an ideal scenario THAI would work and this could be a homerun because THAI is a game changer for heavy oil / oil sands production.

    I can’t do this justice, but I know enough to understand that if THAI can reach a economic level of production (which it apparently now has) that it is incredibly valuable. Here is basically why:

    1) The competing technology is called SAGD

    2) Per Petrobank’s reserve auditor (and as Petrobank obviously believes) the THAI process impacts 17% more oil in place than SAGD.

    3) And of the oil in place that is impacted THAI recovers 70% while SAGD recovers 40%

    4) So THAI will impact both more of the oil in place (17% more) AND recover 70% of what it impacts instead of only 40%

    An example is the best way to understand the impact.

    In a scenario where SAGD impacts 1 billion barrels of oil in place, THAI would impact 1.17 billion barrels. SAGD would recover 40% of the 1 billion barrels impacted which is 400 million barrels. THAI would recover 70% of the 1.17 billion barrels impacted which is 819 million barrels or 105% more.

    How valuable is a technology that allows for twice as much oil to be recovered ? Very valuable. Certainly worth billions.

    And there is more to like about THAI than just the efficiency/effectiveness of production

    - It has a lower capital cost as there are no steam or water handling facilities

    - It has a lower operating cost as there is minimal natural gas and water handling

    - It has higher netbacks as it upgrades the oil being produced

    And it isn’t all financial, as it is also much more environmentally friendly

    - Smaller surface footprint

    - Less refining required due to upgraded oil

    - 50% less greenhouse gas

    - CO2 capture ready

    The most exciting part of the call for me was John Wright’s (CEO) answer to the following question:

    “Which is more economical, a THAI well at 200 barrels per day (which is what they are at) or a typical Bakken well being produced by Petrobakken.”

    Wright indicated that at 200 barrels per day the THAI well has very similar economics to a Bakken well. The Bakken well will have a higher netback but declines more quickly, while the THAI well stays flat for longer. And he further stated that with all due respect to Petrobakken at 600 barrels a day (which is where they expect the THAI well to eventually stabilize) it is much more economic than a Bakken well. In other words THAI is making heavy and oil sands oil that is very tough to extract as economical or more economical than shale oil.

    I fully admit to being out of my depth in trying to understand this technology. What I do know is that I’m not paying anything for it in Petrobank’s share price, and that achieving a steady state of production which they now have makes THAI enormously valuable.

    I’m sure there are bumps in the road ahead, but based on what we heard today things certainly look very good for Petrobank shareholders.

    Please head to my blog or to the comment section if you would like to discuss further or if you can help me understand this better.


    Disclosure: Long Petrobank
    Tags: PBEGF, XOM, RDS.A, TOT, BP, SU, CHK
    Nov 17 9:12 AM | Link | 1 Comment
  • Klarman and others warn Bernanke on Inflation/Dollar

    It there any better way to protect yourself than oil exposure ?

    http://valueinvestorcanada.blogspot.com/2010/11/seth-klarman-and-others-write-to.html
    Tags: XOM, BP, C, AXP
    Nov 16 4:42 PM | Link | Comment!
  • Undervalued uncoventional Bakken play - Williams makes Bakken land grab
    The big land grab continues.

    http://valueinvestorcanada.blogspot.com/search/label/Petrobakken
    Tags: WMB, LSTMF, PBEGF, BEXP, KOG, ROSE
    Nov 15 2:08 PM | Link | Comment!
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