While the usual suspects were arguing yesterday about Petroamerica's prospects (seekingalpha.com/article/3248665-petroam...), it was announced that Petroamerica (CVE:PTA, OTCPK:PTAXF) had reached an agreement to purchase Petronova (CVE:PNA, OTC:PRVAF) in an all stock deal. (News release here: www.petroamericaoilcorp.com/main/include....) Value Digger (who has been an advocate for Petroamerica) promises an article that we all keenly await. In the meantime, I offer my view.
On the closing of the deal, holders of Petronova kill receive 0.85 shares of America. Given that there are 225 million shares outstanding, this will increase Petroamerica's outstanding shares by about 25%. What do Petroamerica's shareholder's get in return? The most important points in my opinion are:
- A significant increase in Proved and Probable Reserves (2P), and with it its Reserve Life Index (NYSE:RLI). Before the acquisition, Petroamerica's 2P reserves were estimated at 8.2; Petronova's, are 6.3. The acquisition thus increases the reserves by 78%, a significant positive.
- An insignificant increase in immediate production. Petronova's current daily production is a meagre 304 bbl per day, which increases Petroamerica's 5400 estimated current production by 5-6%, a small negative (given that the production per share will fall by c. 15%).
- A small diminution of its cash when Petroamerica takes over Petronova's $1.6 of debt, a negligible negative.
- The addition of assets for which Petroamerica will be the operator. (In joint ventures, operators make the decisions about where and when to drill; non-operators contribute to the costs in proportion to their working interest. Almost all of Petroamerica's assets are as non-operator, which has been hampering its ability to increase its production through the drill bit.)
All-in-all, this seems to me to be a positive deal for Petroamerica shareholders. For me, the most important concern was Petroamerica's lack of operated assets, which left the company exposed to the whims of its partners. Going forward, the question remains whether Petroamerica will be successful as an operator, a role that it is new to.
Disclosure: The author is long PTAXF.