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  • U.S. Gulf Coast Mid-Stream And Petrochemical Renaissance To Increasingly Boost Seaborne Trade?

    The American unconventional hydrocarbon revolution has gained momentum in popular media over the last year. Headlines declaring that the United States have overtaken Saudi Arabia and Russia in petroleum production becoming an everyday occurrence. I wrote a detailed dissertation on the topic last year, which is available here.

    A lot of the predictions that were presented in the analysis are starting to come to pass, with EIA's latest weekly crude oil statistics showing a year-to-date production increase of 1.286 mb/d (+19.5%) and decrease in imports of 1.167 mb/d (-13.2%). Meanwhile, the somewhat laggy natural gas data showed is showing a gradual upward development with dry gas production reaching 69.2 bcf/d for July. 2013 is poised to be an all-time-high year for gross gas withdrawals since 1972, with recent report suggesting record production from Texas' mature heavyweight Barnett Shale and its younger Appalachian brother, the Marcellus Formation. The latter has grown to an impressive current-day production of 7.5 bcf/d - a mere couple of billion cubic feet less than Norwegian output - from 400,000 mcf/d in 2010.

    The petroleum production increase provides companies catering to the petroleum industry, from the wellhead to the consumer, with an abundance of lucrative business opportunities. Moreover, the trickle-down effect of the increased petroleum related activity is witnessed throughout the economy, by bringing down the cost of energy, creating jobs and increasing tax revenues.

    New intrastate pipelines along with additional gas treating, processing, and fractionating plants are frequently announced. Because of the infrastructure expansion, service and manufacturing sectors throughout the country is benefiting. Be it, suppliers of rail equipment, steel mills, engineering firms, industrial contractors, truck manufacturers, down to the niche of mining specialized fracking sand.

    Gas still cheap:

    In contrast, natural gas producers such as Chesapeake Energy (NYSE:CHK) are not rubbing their hands, with the presently suppressed natural gas prices making production scarcely economic, urging drillers continue focus on liquid rich shale plays. Due to the low prices, infrastructure constraints and transportation bottlenecks, considerable parts of the associated gas is considered an unwanted by-product and is actually flared off. This is especially true in North Dakota and Wyoming.

    The activity increase is particularly visible in the mid-stream petroleum sector, with a record surge in investments in pipelines, railroads, trucks and barges. The (former) substantial price differentiation between the landlocked Midwest crude and Oklahoma-delivered West Texas Intermediate (which again has traded at a $10-$20 discount to the global de-facto benchmark, North Sea Brent) has spurred arbitrageurs to move crude to coastal states in the South and East (where Brent prices are attainable). Today, in excess of 1.4 million barrels of oil is transported by rail every day.

    Meanwhile, there has been a transformation in the mid-stream segment, with pipeline operators becoming more integrated with activities including processing, treating, fractionating and storage of gas and liquids. The biggest names in the industry include Enbridge (NYSE:ENB), Spectra (NYSE:SE), Enterprise Product Partners (NYSE:EPD), Williams Companies (NYSE:WMB), Kinder Morgan (NYSE:KMI) and Energy Transfer Partners (NYSE:ETP), which all have valuations north of 20 billion dollars and a collective market capitalization of $257 billion. To put that in perspective, it is the equivalent of 83% of the Oslo Børs Benchmark Index' (OSEBX) value. Moreover, the 62 company strong Dow Jones U.S. Pipelines Index (DJUSPL) is up by 256% since the beginning of 2009, outperforming the broad S&P 500 Index by over 150%.

    Refining renaissance:

    Another characteristic of the mid-stream bonanza, is the increased activity in the refining sector. The capacity utilization has surpassed 90% with previously shuttered plants being brought back on-line, and even urging building of new refineries for the first time in the country in 35 years. Two of them have broken ground in North Dakota and one is expected in Utah.

    Texas, with its oil rich history, has 27 refineries by itself and is together with its Gulf Coast neighbors the largest global refinery center with a total processing capacity of about 9.6 mb/d (more than half that of the whole country). Gulf Coast refiners are largely set up to accept heavy and sour crudes (traditionally sourced from Mexico, Venezuela and Saudi Arabia), but many are opting to re-gear their facilities to accommodate the lighter, sweeter and cheaper domestic crude.

    The extensively watched WTI-Brent spread has widened back to around $10 per barrel, coupled with the improved infrastructure making the inland crude more easily available, has led to favorable crack spreads (margins) for USGC and Midwest refiners. Refiners are selling gasoline, diesel, kerosene and other distillates at prices linked to the more expensive Brent. Moreover, with the low price of natgas feedstock, direct access to the biggest domestic oil products market and deep-water port facilities, they can export to any part of the world at the highest prevailing prices. While its European refinery counterparts are running at a meager 78% capacity and struggling to earn 125 cents on the output of a barrel, U.S. refineries with traditional delayed coker design has been able to rake in upwards of $18/bbl. Valero, the world's largest independent refiner, has spent $3 billion on new hydrocrackers for two of its USGC refineries and is reporting of an internal rate of return (NYSE:IRR) in excess of 30% for such bolt-on upgrades.

    The improvements in competitiveness, together with declining domestic demand, has made the United States the largest exporter of petroleum products in the world, with July (the latest available data) marking an all-time-high of 2.68 mb/d (up almost 50% from 1.43 mb/d in 2009) worth of exports, the bulk of which (1 mb/d) is diesel and fuel oil.

    New York-listed Scorpio Tankers (NYSE:STNG) showed prescient when observing the above-mentioned trend, and acting accordingly by essentially cornering the newbuilding market for vessels that transport petroleum-derived products. The company has ordered a whooping 54 tankers, with sizes from Handymaxes to LR2s, occupying the best build slots at tier-one Korean shipyards until 2015. Together with its 48 owned and chartered-in vessels, the fleet counts 102 and constitutes 6.42 million deadweight tons, making Scorpio the world's largest product tanker owner.

    Norwegian equities:

    However, opportunities are not limited to offensive domestic companies. Several Norwegian based/listed companies have already benefited handsomely from the development, and may be poised to continue to do so. Hexagon Composites (HEX), Solvang (SOLV), Aker Philadelphia Shipyard (AKPS), Odfjell SE (ODF) and Stolt-Nielsen (NYSE:SNI) are some of which are favorably positioned.

    The Jones Act cabotage laws - which prohibit domestic seaborne transportation with vessels that are not U.S. flagged, crewed, owned and built - has pushed day-rates for such tankers upwards of $70.000. This in turn, is responsible for the distorted trade-flows wherein USGC petroleum exports typically heads south to Mexico and Latin America, while refined products from Europe or Canada supply the East Coast. Aker Philadelphia Shipyard - a previously struggling company facing potential bankruptcy - now stands as one of two shipbuilders with the capability to build Jones Act compliant tankers, and its stock has seen an unprecedented 488% gain this year.

    Hexagon manufactures composite pressure vessels and storage systems for LPG and CNG, both in Norway and Nebraska. The company is doubling the production capacity of its U.S. product line, as higher demand has increased annual revenue 81% as per third quarter. The HEX stock is up 253% since the beginning of the year. In its latest report, the company points to the U.S. heavy-duty vehicle market as being positioned for "exponential growth".

    The Stolt-Nielsen name is no stranger to Norwegian households. Credited for being the inventor of the parcel tanker, the firm was established in 1959 and is the world's largest owner and operator of chemical tankers. Chemical tankers are smaller than most tankers and carry hundreds of different chemicals, including alcohols for solvents, aromatics for paints and sulfuric acid for insecticides. The U.S. is the largest exporter of organic chemicals, accounting for about a quarter of global volume.

    In its latest quarterly report, the company is cautious about the market outlook for its vessels, and states that it has not seen an increase in U.S. volumes "despite talk of the potential impact". The company has become more integrated and branched into tank farms and distribution (Stolthaven Terminals) and leasing operations of tank containers (Stolt Tank Containers), both of which are poised to do well in the wake the shale development. The stock has returned 47% this year, but has higher analyst exposure and healthier liquidity than the others in mention.

    Foresighted investors have had excellent opportunities to take advantage of U.S. shale exposure through positioning themselves in the aforementioned equities. Similar analysis was likely the background for superstar value investor Warren Buffet's acquisition of Burlington Northern Santa Fe Corporation at the end of 2009, and specialty chemical manufacturer Lubrizol Corporation in 2011.

    Solvang ASA, the operator and (partial) owner of 17 LPG/ethylene carriers, is well positioned for increased demand for said tonnage and may be next in line for a stock price boost. There has already been large-scale consolidation and M&A activity in the segment, with NOTC-listed entrant Dorian LPG (DORIAN) teaming up with Scorpio, and Avance Gas (AGHL) formed by Fredriksen-controlled Frontline 2012 (FRNT), Stolt-Nielsen Gas and Sungas Holdings. Additionally, the largest LPG shipowner, BW Gas, is expected to (re)list on the Oslo Børs at the beginning of 2013 with a plan to raise upwards of $200 million in new equity for further growth.

    Maritime service providers and brokerages are also expanding, with Norwegian gas specialist shipbroker Inge Steensland setting up a subsidiary in Houston expected to open early next year.

    Natural gas liquids:

    An aspect of the hydrocarbon production revolution that thus far has not received much scrutiny is natural gas liquids (NGLs) and liquid petroleum gases (LPGs). NGLs and condensates are components of the natural gas stream that are liquid at surface, and include propane, butane, pentane, hexane and heptane. There are many uses for NGLs, spanning many sectors of the economy, but the majority is consumed by the petrochemical industry. The petrochemical sector is a $770 billion industry, providing 784,000 jobs, holding 17% of all patents and constituting 12% of U.S. exports. Equally importantly, it provides the public with products essential in manufacturing plastics, paints, building materials, clothing, fertilizers, automotive parts and a range of other consumer and industrial products.

    Much like its gaseous brother, NGLs are equally inexpensive and substantially cheaper than in other global markets. In 2012, gas plant NGL production averaged 2.4 million b/d, up 8% from 2011. Energy banking specialist, Simmons & Company, estimates potential NGL production to rise to 2.76 mb/d (363,000 b/d) for this year and 3.34 mb/d (581,000 b/d) in 2014 - almost double Norway's crude oil output for 2012.

    Whereby European and Asian ethylene producers mainly are set up to use more expensive oil based products, such as naphtha - the price discrepancy is a gift to domestic industry players. With the current glut of ethane, and prices hovering around 40 cents/gallon, it costs around $450 to make a ton of ethylene. This compares to about $1,250/ton for producers using naphtha, assuming an oil price of $90/bbl. Ethylene account for 40% of global chemical trade and is an essential building block in the making of plastics.

    Therefore, it is no surprise that American Chemistry Council is reporting of 17 separate ethane cracker plant projects, brownfield/expansion or greenfield, planned or under consideration. Propylene, also a by-product from ethane cracking, is the second most important starting product in the petrochemical industry and has seen a drop in production due to the shift away from naphtha feedstock. Accordingly, the industry is adapting and dedicated propane dehydrogenation (NYSE:PDH) plants are starting to pop up. These plants processes propane into propylene, but has previously not been economically viable because the price gap between the two gases have historically been low. With the price of propane coming down from its $2/gallon highs in 2008, the spot price as of yesterday was $1.17 delivered FOB Mont Belvieu. Mont Belviue in Texas is the main storage hub for NGLs, similar to what Cushing (Oklahoma) is to crude and Henry Hub (Louisiana) is to NG.

    PetroLogistics (PDH) is a Houston-based niche player that acted on these market conditions taking note of the tight propylene supplies. It has been running the largest PDH plant in the world (544,000 tons/year) since 2010 and opted to perform an initial public offering in May last year. Further five plants have been announced in the Texas-area with a collective annual capacity of 5.1 million tons.

    Supermajor stronghold:

    The development has not only been getting attention from smaller players, with big names like Dow Chemical (NYSE:DOW), LyondellBassell (NYSE:LYB), ExxonMobil (NYSE:XOM), DuPont (NYSE:DD) and Phillips 66 (NYSE:PSX) all expanding their NGL derived petrochemical activity. It is in fact also luring foreign chemical giants, such as Anglo-Dutch oil major Shell (RDSA), Germany's Bayer AG (OTCPK:BAYN), São Paulo-based Braskem (BRKM3), South-African Sasol (OTCPK:SASOF) and Saudi SABIC, whom together reportedly have committed over $100 billion in investments in the sector.

    If the increased supplies of propylene and ethylene does not find its way into the local industry, it will likely be sent overseas and could therefore give chemical tanker rates a deserved boost. This would potentially benefit Norwegian shipowners with this type of tonnage, mainly Stolt-Nielsen (SNI), Eitzen Chemical (EICHEM) and Odfjell Tankers (ODF).

    Exports of NGLs and refined products does not face the same regulatory hurdles as crude, making the case for readily available LPG a strong one. With NGL pipeline capacity expected to increase by 2-2.5 million b/d during 2013-15, along with 1.4 million b/d (54% increase) of fractionation capacity to come online in the same time period, the case for exports is a strong one. Both Phillips 66 (PSX) and Enterprise Product Partners (EPD) recently announced plans for new LPG export terminals at the Houston Ship Canal, with 4.4 and 6.5 million barrels per month capacity respectively - the equivalent of almost 20 very large gas carriers (VLGC). This bodes well for pure-play VLGC operators Avance Gas (AGHL), Dorian LPG (DORIAN) and their more diversified peer, Solvang ASA (SOLV).

    With the intense competitiveness of the United States' energy environment, one will likely see a gradual equalizing of gas/liquids/chemical prices as infrastructure advances and traders monetize on arbitrage opportunities. However, long-term fundamental prospects are very sound, with industries and sectors across the economy poised to benefit from the cheaper energy.

    Energy superpower:

    The resurgence in petrochemicals and the resulting gas demand will likely be competing for supplies with utilities, transportation, manufacturing, as well as exports of both LNG and NGL. Yet, consensus among analysts paints a picture of continued abundance of NG supplies. Factors beyond low-cost feedstock, such as value-adding characteristics, strategic location, strong international demand and industrial symbiosis, has evolved the country into the (once again) world-leading petrochemical and specialty chemical centre, likely soon to be rivaling cost levels of subsidized Middle Eastern producers.

    Given the expansion project of the Panama Canal expected to finish by 2015 and United State's strategic location bordering the two largest oceans, makes commodity thirsty markets in Asia and Latin America easily accessible by seaborne transport. Having formerly been carrying the title the "breadbasket of the world", due to the country's widespread exports of corn and wheat, United States may now be underway to evolve into the "oil refiner and petrochemical maker of the world".

    At today's run-rate, diesel exports alone are generating revenues exceeding that of El Salvador's GDP (~ $50bn p.a.). Furthermore, the U.S. logged a trade surplus of $800 million in chemicals last year - the first time since 2001. Longer term, the exports of hydrocarbon-derived gases, chemicals and products will likely be of considerable importance in improving the country's trade deficit. Some industry sources suggest specialty chemicals alone will generate a $46 billion trade surplus by 2020.

    One investment bank has calculated that the natural gas price differential may provide an additional 1.5 percentage points of GDP output relative to Europe each year, assuming the disparity persists. In any case, the development will continue to be of crucial support for the world's largest economy, which is undergoing an undisputed fragile macroeconomic recovery.

    Nov 06 7:06 AM | Link | Comment!
  • Flex LNG: Big John Sees Value In Settlement Leftovers

    Oslo Axess-listed Flex LNG Ltd. (FLNG:NO) was established in 2006 by three young entrepreneurs with a vision of a floating liquefied natural gas (NYSEMKT:LNG) vessel system that theoretically could produce, liquefy, store and transfer LNG at sea (imagine a vastly more complicated FPSO vessel intended for gas). Although nothing new at the time (conceptual studies were done all the way back in the 1970′s), the company was able to attract investor interest and rounded up several million dollars in equity financing, off of which $458.7 went straight to Samsung Heavy Industries (NYSE:SHI).

    Contracts were signed in the course of 2007-2008, and this was the initial down-payment for the supposed $2.4 billion project, whereupon Samsung was to supply a total of four vessels and perform all front-end engineering, procurement and construction. However, with credit markets freezing up in midst of the financial crisis, Flex LNG were unable to come up with funds for additional installments. The parties have been in a stalemate ever since 2011, with FLNG initially seeking full repatriation of the money. Months of "discussions" (i.e. angry letters from costly lawyers) followed, with FLNG seeking a resolution where parts of the capital would be redeployed to new contracts for the construction of alternative tonnage.

    Arbitrage proceedings were initiated before the summer, and the outcome was as uncertain as a fledgling in first-flight, with the reimbursement potentially ranging anywhere between $400 million and 0 (yes, that's zero) dollars. This uncertainty is not appreciated in the stock market and it made FLNG an unattractive and binary case, leading to trading liquidity completely drying up. Lo and behold, a settlement was reached at the beginning of September, pegging the compensation at $210 million, which is to be redeployed towards two (2) top-spec 174,000cbm tri-fuel (TFDE) LNG carriers. Korean news sources suggest they are fixed at $201 million each, which seem like a fair market price (considering recent similar orders), and terms where the balance is not due until delivery in early 2017. My intention is not to delve into the fairness of the settlement, but for FLNG's investors it came as a great relief that doubled the value of their severely underwater investments overnight. The liquidity explosion that ensued enabled worn-out shareholders to rid their holdings of the stock. One company that did so was InterOil Corporation, which sold its entire 7.1% holding to none other than shipping tycoon and multi-billionaire John Fredriksen's holding company Geveran Trading.

    Fredriksen is no stranger to M&A activity, well known for his numerous opportunistic takeovers and corporate raids. John and his companion, Tor Olav Trøim, has a sixth sense for takeover targets in financial distress and companies trading below intrinsic value. The methodology is based on leveraging said situations in order to pick up discounted tonnage that is implemented in the group's companies with a resulting accretive valuation effect. This is the drill (pun intended) for Seadrill, Frontline, Golden Ocean and Golar LNG - which for years have been the destination for bolt-on assets acquired by Fredriksen personally at substantial discounts.

    Not surprisingly, Fredriksen is seeing similar potential in FLNG. Post-settlement, the company is no longer a jeopardy gamble, but on the contrary, a very transparent case with a balance sheet that is cleaner than a virgin soaked in detergent. Crunching the numbers is amusingly easy, today's (strong) USD/NOK, a trivial debt load and last trading price pegs the enterprise value at $135.1 million, which gives an implied per-unit valuation of $163.5mn. for each of the LNG carriers. My own fair-value estimate comes out to 10.39 NOK/share when taking into consideration the cash position pr. Q2 ($3.9mn.) and (potential) resale value of the LNG loading arms ($0-10mn.).

    Like a kid getting his milk money stolen in the school yard, Fredriksen has for the last three weeks clutched his fists around the shareholders' legs shaking them upside down in order relieve them of all the "loose stocks". Now, the grip is getting firmer and the stock price has been allowed to climb fractionally. A not unknown strategy of dispersing the purchases between several different brokers, to suppress the attention of a potential takeover, is willfully being employed. Another factor that speaks in John's favor, is the fact that Flex LNG is a British Virgin Islands-domiciled company, therefore it is exempt from the normal disclosure requirements which also tends to give stock prices a boost. Normally being required to flag the crossing of both the 10% and 15% ownership threshold, Fredriksen has been able to vacuum the market for stocks in silence due to this slight loophole. A rough estimation indicates that Fredriksen has gotten his hands on in excess of 19 million shares, equivalent to about 15% of the outstanding stock.

    Taking into account the weighted average guesstimation of his purchases thus far, Big John can choose to bid 9,- NOK/share (~ 35% upside from closing) for the remainder of the shares and still walk away with a respectable deal. The before-mentioned offer would at imply a minimum discount a hair under $30 million on the combined order, but more likely be closer to $40 million when considering the cash position and sales proceeds from the buyer's supplies. Considering the contract price for the LNG carriers, this still equates into a financial rebate in the order of 7.5 - 10% on the ships, which is substantial for an industrial player like Golar LNG (or Golar LNG Partners) which have highly compatible and well-lubricated operational organizations.

    My bet is that John Fredriksen, in his signature penny-pinching style, will start out with a low(er) bid, attempting to gain interest from the more short-term owners. Nonetheless, the company's direction is likely to be somewhat dictated by the two main industrial ownership fractions (both of which are represented in the board), Hamburg-based Schulte Group (5%) and Japanese Kawasaki Kisen Kaisha (better known as K-Line), which operates its own fleet of 40-odd LNG carriers. Controlling 18.7% between them, these parties may both have interest in the newbuilding contracts, paving the way for a potential bidding war - or at least being instigators for a (more) fair valuation of the ship duo.

    The aforementioned value estimation does not take into account the potential upside value of said contracts. Maylasian oil major Petronas only just ordered a set of four 150,000bcm LNG carriers from Hyundai Heavy Industries (HHI), also with delivery in 2017, at a contract price reported by shipbrokers to be $212.5mn/each. This bodes well for FLNG's contracts, as it is an indication that the newbuilding market for this type of specialized tonnage is tightening as slot availability at the top-tier Korean yards is becoming constricted.

    With a likely 20-35% bid premium, this stock is the closest thing you get to picking up money from the street on the Oslo Stock Exchange. Additionally, a board of directors which is exclusively remunerated in company stock, gives investors great comfort in knowing that interests are aligned and the company is well-appointed for a takeover - hostile or otherwise.

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

    Additional disclosure: I am long FLNG.

    Oct 11 5:22 AM | Link | Comment!
  • Panoro Energy: A Low-Risk Case Of Untrapping Mismanaged Value

    Panoro Energy ASA (PEN:NO, PENO.OL), an Oslo-listed micro-cap E&P player, that for the better part of one year has been undergoing a strategic evaluation process (which loosely translates into "we need to please our dammed shareholders somehow"), has in a matter of a short month announced the sale of two assets at a total consideration of $190million.

    The company traces its roots back to a 2010 combined merger between Pan Petroleum and Norse Energy Corp's spun-off Brazilian division, which today comprise the company's asset base of West-African and Brazilian oil licenses and development projects. This move was said to combine complementary assets, yield synergies and "enable superior performance". The development that ensued however, in both project execution and stock price performance, was far from superior.

    Since the company's inception three years ago, investors have injected $343 million in equity through several private placements. This same equity is at time being valued at a meager $121mn, implying a loss of 65% for investors that partook in the equity issues. A few operational delays and minor mishaps, drove the stock down to a bottom of 2,35 NOK, pegging the implied loss at 73%. This dismal stock performance has undoubtedly created a breeding ground for dissatisfaction and a sentiment of discontent among short and long-term equity holders. This is the backdrop and instigator for the divestment process that we now finally are seeing the results of.

    Sector Asset Management, a beleaguered Norwegian stock fund managing group, and its affiliated funds and persons has been the backer of both the predecessors of Panoro and the present company. There are several conspiracies surrounding the fund manager involvement in the company and the lackluster stock price development, but Sector rightfully gained an increasing level of mistrust when shamelessly promoting the stock in the media right before selling down their stake.

    Now however, the power balance has shifted and Sector's influence has been marginalized. This was demonstrated during last week's annual general meeting, when a coalition of minority shareholders voted down the board's remuneration package and in essence gave the (Sector-affiliated) chairman the boot. This power demonstration was the reckoning of a petition calling for shareholder value maximizing, comprising a shareholder grouping with about 14% of the voting rights. Of course, this would not be possible if it was not for the fractured ownership structure consisting of unconscious and apathetic fund managers.

    Assuming the sales are finalized and closed in accordance to the agreed terms, the company will become a lean ten-person organization with a debt-free balance sheet. Remaining assets are 20% stake in the Mengo-Kundji-Bindi (MKB) fields in Congo-Brazzaville, 33% in the Dussafu Marin block outside of Gabon and the BS-3 project in Brazil, a series of gas finds in the Santos Basin. Additionally, there is a $128mn. deferred tax benefit applicable in the Norwegian jurisdiction.

    The next item on the sales list is MKB, and despite repeated sale assurances followed by breaches, the management seem convincingly confident in a shortly divestment. MKB is a world-class asset, with an estimated billion barrels of light, waxy oil in the ground, it is said to be the largest onshore field in Sub-Saharan Africa. Nevertheless, tough permeability conditions and declining oil price led French oil major Elf to abandon the project in 1992. With today's widespread use of hydraulic fracturing, horizontal drilling and water injection, the field is in the process of being revitalized. Even with a strenuous and inept NOC as operator, the asset may fetch a fair sum from the appropriate buyer. Geopetrol, a private Franco-Swiss oil junior, has been rumored to be the prominent party in past/ongoing negotiations. The price expectancy and outcome potential is highly uncertain, with analysts expecting anything from $20 to $100 million. My weighted expected price outcome with negatively skewed probabilities ($25mn./50%; $45mn./40%; $65mn./20%), pegs the expected value at $39mn. Anything north of this amount will likely be very positively received in the market.

    Considering today's cash position (~ $68.5mn.) with the addition of the sales proceeds (~ $194.5mn. incl. positive working capital consideration), adjusted for the sold subsidiary's deposits ($17.5mn.), subtracting the redemption of the outstanding bond debt ($126mn), incl. additional settlement costs ($16.4mn), net cash per share comes out to 2.67 NOK. Accounting for the $20 million earn-out component of the Manati consideration, which roughly should equal ~ $5.4mn. per year for four years, yields a net present value of $15.2mn. attributable to 0.39 NOK/share. Proceeding by netting out accounts payable against receivables, leaves one with a net-net cash figure at 2.80 NOK/share.

    The tax benefit position may be utilized directly by an acquiring company and could be worth up to $18mn. (assuming 28% corporate tax rate and 50% derisk discount). Endorsing said assumptions leaves us at 3.26 NOK/share, whereby MKB, BS-3 and Dussafu essentially are thrown in for free. The latter is likely to be given a firm benchmark price within short time, as the operator is seeking to complete a farm-down on the license by September.

    Dussafu is a high-potential, shallow water find that - according to the operator - could be fast-track developed with an FPSO and subsea tie-backs and start producing by next year already. Gabon is a country with a favorable petroleum regime and fiscal terms, additionally there are several oil majors - Shell, Total, Sinopec, Marathon - operating in the vicinity of the license. In a fresh presentation, HNR estimated total mean value of the license to be $1,479mn. (based on an assumption that all leads and prospects contain recoverable resources in line with risked estimations), which would be equivalent to a whooping ~ 19 NOK/share net to Panoro. If HNR could fetch just a fraction of this, it would be great news for shareholders in PEN.

    Irrespective of sales outcome, the company has the authorization to acquire its own shares and may do so when its bonds are redeemed. Depending on the market's reception of the sale progress and its willingness to price in assets, this may prove to be the ideal usage of company funds as buying assets below fair value is accretive to shareholder equity and as such offers a higher return than other investments.

    Risk/reward is looking very attractive at these stock price levels (+/- 2.90 NOK), and the upcoming news-flow and continued focus on asset unlocking should push the stock closer to its intrinsic value as management trust is reestablished and normalized valuation mechanisms are triggered. If one are inclined to believe that the company's Congolese and Gabonese assets are worth half of what analysts are saying, anything below 4,- NOK per share appear unrighteously cheap.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I am long PEN (PEN:NO, PENO.OL).

    Tags: long-ideas
    Jun 27 11:09 AM | Link | Comment!
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