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PetroBakken Dodges Debenture Bullet Early, Deals Waterflood Assets To CPG

|Includes:Crescent Point Energy Corp (CPG), LSTMF

SOURCE: - In a move to better prepare for an upcoming put option date set for February 2013, Petrobakken Energy (TSX:PBN)(PINKSHEETS:PBKEF) made a deal yesterday worth $427 million with Crescent Point Energy (TSX:CPG)(PINKSHEETS:CSCTF) for its Bakken Waterflood Assets in the Viewfield Bakken light oil resource play in southeast Saskatchewan. The move comes four months after Petrobakken CEO John Wright addressed his 400 employees and select shareholders through a letter that suggested future asset sales were imminent to deal with the company's US$750 million worth of convertible bonds, and mitigates the possible need to water down PBN stock.

Wright's letter in October 2011 raised the possibility of issuing new stock. The situation looked dire, as the company's stock was languishing in the mid-$6 level, which would've required some heavy dilution. A worst case scenario was addressed in the letter, albeit without going into detail of the repercussions, as the CEO wrote, "We have the ability to renegotiate the existing convertible debenture, albeit at a cost in terms of dilution."

Early sentiment in the market at time of this publication show that Wright and his PetroBakken team is being rewarded for the deal, with a nearly 7% bump and $1 rise in share price. Crescent Point, on the other hand, is taking a slight hit, with a $1 decrease, and a 2% drop. The reaction is most likely tied to the optics of the economics involved, but Crescent Point should recover nicely once the dust settles.

Crescent Point is acquiring waterflood ready assets, which are expected to be the next step in the development of the Bakken. The deal addes more than 2,900 boe/d of production and more than 25 net sections of land in the Viewfield Bakken resource play, and is expected to help accelerate Crescent Point's waterflood program. In addition to the $427 million deal, Crescent Point also tacked on a $130 million southwest Manitoba Light Oil asset acquisition near its existing Manitoba properties bringing approximately 940 boe/d of high-quality, high-netback, low-decline light oil production. If all goes to plan for CPG, they should exit with 2012 with a production rate of 93,000 boe/d over its average production from 2011 of 83,500 boe/d.

On the surface, it looks like PetroBakken is the early winner in this deal, as it gets closer to meeting its one-day requirement of cash to answer the put bell next February, so long as it keeps its share price high enough to not have to over-dilute to meet the $323 million remainder of its $750 million obligation. For Crescent Point, yesterday marks the move into the water flood era, as adding water injection should in theory increase the 2,900 boe/d production to an even more impressive level. If properly designed and operated, a water flood can double the reservoir's oil recovery, and essentially this is the direction that Crescent Point is moving in.

To pay for this acquisition, Crescent Point will be raising $525 million starting March 8, 2012 through a bought deal agreement with a syndicate of underwriters that includes BMO Capital Markets, CIBC and Scotia Capital Inc., RBC Capital Markets, TD Securities Inc., FirstEnergy Capital Corp., National Bank Financial Inc., GMP Securities L.P., Macquarie Capital Markets Canada Ltd. and Peters & Co. Limited for an offering of 11,610,000 Crescent Point shares at $45.25 per share. With the stock trading at $45.45 today, this shouldn't be a problem going forward, as the underwriters are bearing the risk.

As per the press release, the Key attributes of the Bakken Waterflood Assets, include:

  • Current production of more than 2,900 boe/d, approximately 90 percent of which is high-quality, long-life light crude oil;
  • Netback of approximately $63.00 based on US$95.00/bbl WTI, Cdn$3.25/mcf AECO and US$/CDN$0.96 exchange rate;
  • 31.8 net sections of land, including more than 25 net sections of Viewfield Bakken land in the most productive area in the Bakken resource play, of which 3 net sections are fee title lands;
  • 2 multi-well batteries and pipeline infrastructure;
  • 18.2 net booked locations and an additional 1.2 net internally identified low-risk drilling locations at a drilling density of four wells per section, with an incremental 12 net booked locations and an additional 47 net internally identified drilling locations at a drilling density of eight wells per section; and
  • Tax pools estimated at $427 million.

G. Joel Chury
Editor in Chief

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: CPG, LSTMF