It has been an exceptionally busy week for Canadian unconventional light oil producer Petrobakken (PBKEF.PK), which has made a series of announcements, all of which Mr. Market has reacted favorably to.
For several months investors have been concerned with a convertible debt put option that in early February 2013 (13 months from now) allows for the holders of $750 million of convertible bonds to force repayment from Petrobakken.
Petrobakken would at that time have the option to repay the bonds in either cash or shares of Petrobakken at the then prevailing share price. Because Petrobakken hasn't had $750 million in liquidity obviously available to deal with this in cash and because the share price has been depressed investors have been concerned that the put option could result in significant dilution for existing shareholders.
I've been of the opinion that these concerns have been wildly overblown and that Petrobakken has a number of different options available to deal with the put option without diluting shareholders. This week Petrobakken has pretty much fully addressed any concerns about this put option.
Step 1 - Long Term Note Issuance
PetroBakken Energy Ltd. today announces that we plan to commence, subject to market conditions, a private placement offering of US$750 million aggregate principal amount of senior notes due 2020 (the "Notes"). The Notes will be senior unsecured obligations and guaranteed on a senior basis by each of the Company's subsidiaries who are guarantors under our senior secured credit facility and certain future subsidiaries.
Petrobakken needed to have $750 million available to avoid any dilution from convertible bondholders wishing to exercise their put option next February. Step one above provides $750 million.
Step 2 - Increase Existing Credit Line
"Concurrent with the Notes offering PetroBakken has requested that our existing senior secured credit facility be increased by $150 million, providing for total credit availability of $1.5 billion, with a maturity date of June 2, 2014. As at December 31, 2011, we had $1.2 billion drawn on this credit facility."
Petrobakken already had $150 million available under this credit line, and it now has $300 million. The previous credit limit of $1.35 billion was established when Petrobakken was producing under 40,000 barrels per day. With production now over 50,000 barrels per day I felt quite certain that this credit line would be increased as it now has.
Step 3 - Repay Some of Those Convertible Bonds
A portion of the net proceeds from the proposed offering of Notes will be used to fund our tender offer for up to US$450 million aggregate principal amount of our outstanding 3.125% convertible bonds due 2016, which was also announced today, with remaining proceeds used to repay indebtedness under our senior secured credit facility.
Petrobakken is going to use some of the $750 million of long term notes immediately and will repay up to $450 million of the convertible bonds that were causing the headache. Once these convertibles have been retired there will only be $300 million of convertibles still outstanding.
Step 4 - Sell Some Non-Core Assets
PetroBakken Energy Ltd. announced that it has entered into an agreement to sell entire working interest in the southeast Saskatchewan Weyburn unit (approximately a 2.2% interest) (the Assets) for gross proceeds of $105 million, subject to adjustments. The Assets include 580 boepd of production (based on field estimates from December 2011). Approximate transaction metrics in respect of this sale of these non-core Assets are $180,000 per flowing boe (based on field estimated December 2011 average production), 9 times 12 month trailing cash flow (October 2010 to October 2011) and $23 per boe of gross proved plus probable reserves.
Petrobakken is selling 580 barrels out of its existing 50,000 plus barrels per day of production for $105 million. That is 1.2% of Petrobakken's production for $105 million. I have confirmed with the company that this sale will have no impact on the company's 750 Bakken drilling locations as this non-core asset is not related to the Bakken.
Making Sense of Petrobakken's Debt, Liquidity and Cash Resources
After these transactions I believe Petrobakken's liquidity and cash flow should look something like this:
Currently Drawn on Credit Line - $1.2 Billion
Less: Proceeds from Asset Sale - ($100 million)
Less: Proceeds from Note Issuance -($750 million)
Add: Payment to Reduce Convertible Debt - $450 million
That should mean that Petrobakken will have $800 million drawn on a $1.5 billion credit facility, leaving $700 million available on that credit facility. Petrobakken would also then have the $750 million of Long term notes outstanding and $300 million of convertible debentures remaining (after $450 million has been repaid). That would be a total of $1.85 billion in debt ($800 million line of credit, $300 million convertibles, $750 million long term notes) for Petrobakken.
If you would refer to page 8 of the most recent Petrobakken presentation you will see that with oil at $105 and the mid-point of Petrobakken's 2012 production guidance (52,500 barrels per day) the company will have $1.2 billion of funds flow from operations in 2012.
That would give Petrobakken a debt to funds flow ratio of $1.85bil/$1.2bil = 1.5 times which is very reasonable.
With $700 million available on the line of credit and $1.2 billion in funds flow from operations, Petrobakken's $700 million of budgeted capex for 2012 suddenly looks very conservative.
Disclosure: I am long PBKEF.PK.