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Petrobank Energy

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December 29, 2010 – Comments (23) | RELATED TICKERS: PBEGD

Below is my pitch for Petrobank Energy (PBEGF.PK).  It's mostly an update of TMFDeej's pitch from October.  I'd recommend digging into the filings carefully before considering Petrobank for investment - I'd only consider the info below as a starting point for one's own research on the company.

Petrobank Energy (Pink Sheets: PBEGF.PK) 

Today's drop in share price seems to be from the new reorganization, in which Petrobank shareholders will receive shares of New Petrominerales that represent their proportional interest in Petrominerales. Since Petrobank shareholders will receive the new shares, the shares of Petrobank Energy have fallen by the perceived value of the Petrominerales shares since Petrobank shareholders are now receiving separate shares of Petrominerales instead of owning it through Petrobank's shares.

To put this all in perspective, I'm going to refer to TMFDeej's pitch (http://caps.fool.com/Pitch/PBEGF.PK/5261203/the-margin-of-safety-in-petrob.aspx), in which he described the parts of Petrobank Energy. Keep in mind this was posted in October, so some of the parts may have changed (I have not made adjustments):

1. 110M shares of Petrobakken valued at $2.5B market cap
2. 65M shares of Petrominerales valued at $1.6B market cap
3. 670 million BOE residing in its parent company
4. Ownership of a potentially game changing oil sands extraction technology that could be worth billions

The market cap of Petrobank at the time was $4.2B.

Going by that information, the Petrobank shares are losing the $1.6B interest in Petrominerales shares and shareholders will instead receive separate shares in New Petrominerales. $1.6B/$4.2B is 38.1%. Today's correction (currently at over 45%) seems to be an overreaction.

I believe this new reorganization adds further value to Petrobank. Assuming Petrobank still owns 58% of Petrobakken (PBN.TO), the value of those shares has a market cap today of $2.38B. Assuming 106M shares are still outstanding for Petrobank, the market cap is $2.49B. For $0.11B, Petrobank shareholders get its interests in the 670 million BOE from the parent company and whatever interests it owns in the potentially game-changing oil sands extraction technology.

The original thesis was that the sum of parts was much greater than the market cap at the time. Today, Petrobank rid itself of the Petrominerales shares (worth $1.6B in October) and took a $2.1B hit in market cap (45.8% drop as of 11 AM on 12/29/10). It seems the market overreacted by $500M to the news of the new reorganization. Not only that, the potential undervaluation of the sum of parts has now been magnified.

23 Comments – Post Your Own

#1) On December 29, 2010 at 12:15 PM, MoneyOre (< 20) wrote:

Petrobakken---PBKEF

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#2) On December 29, 2010 at 12:20 PM, Option1307 (29.70) wrote:

Nice find!

Dogpile anyone? :)

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#3) On December 29, 2010 at 12:23 PM, portefeuille (99.59) wrote:

related articles by swizzled.

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

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#4) On December 29, 2010 at 12:43 PM, Valyooo (99.42) wrote:

Babo,

Excuse my ignorance of oil companies. 670 BOE...i know thats barrel of oil equivalent. So where am I mis calculating?  670M x 91 (current oil price) = 60 billion.  Theres no way this is a correct value.  what am I supposed to be multiplying it by?

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#5) On December 29, 2010 at 12:44 PM, portefeuille (99.59) wrote:

Petrobank Energy (PBEGF) – An Exceptional Risk/Reward Scenario

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#6) On December 29, 2010 at 12:58 PM, Valyooo (99.42) wrote:

How did he come up with the 3.3B

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#7) On December 29, 2010 at 1:01 PM, Valyooo (99.42) wrote:

Also, would the shares of new petrominerales be a buy?

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#8) On December 29, 2010 at 1:14 PM, TMFBabo (100.00) wrote:

@Valyooo: Companies have a cost of extracting the oil.  I'm new to oil and gas so I don't have a realistic range to give you, but it might cost $50 per barrel, for example.  Then the value of the reserves to the company might only be $41 per barrel assuming spot prices today. 

However, it is likely the company has hedged its production through derivatives contracts or other means such as fixed price swaps (agreeing to sell a certain number of barrels per day for a certain amount), collars (floor/ceiling on realized price), forward sales agreements, and more. 

Based on my limited exposure to oil and gas, I've seen a fair number of companies where the net present value of their reserves ended up being $18 or $19 per barrel.  This could be due to their hedges, the forecast of oil prices (which plays into the pricing of their reserves), and whether they operate at a low or high cost. 

Here's my quote from my pitch:

For $0.11B, Petrobank shareholders get its interests in the 670 million BOE from the parent company and whatever interests it owns in the potentially game-changing oil sands extraction technology.

That does assume Petrobakken shares are fairly priced.  If you look at the December 2010 investor presentation (found on Petrobank's website) on slide 20, the 669.1 MMbbl estimate is for 2P (proved + probable) reserves. 

The value of the reserves has a BT NPV 8% of $3.3 billion.  I'm not sure what the BT part of that means (haven't seen it yet in US-based oil and gas companies), but the reserve value was only discounted 8% as opposed to the more standard 10%.  Also, I like conservatively using NPV of just the 1P (proved) reserves if possible.  Still, I'm sure the NPV of the reserves adds at least $1 billion in value.  This compares to the $0.11B differential between Petrobank's market cap and the value of Petrobakken's shares. 

With oil and gas companies, the value is largely dependent on future prices of the commodities.  I'm pretty sure that when PV-10 values are calculated (NPV discounted 10%), they also include certain assumptions on the direction of oil prices.  This is similar to the forecasting of FCF growth when doing a discounted cash flow model - it's not an exact science.

Assuming oil prices keep going up (that's a big assumption), it seems like there's decent value in this company.  Still, this could turn out horribly should oil prices plummet in the future. 

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#9) On December 29, 2010 at 1:18 PM, TMFBabo (100.00) wrote:

It sounds like New Petrominerales is just Petrominerales, so I guess you'd have to evaluate that company's assets separately to see if it's a buy.  The author of the Gurufocus article seemed to believe both Petrominerales and Petrobakken were undervalued at the time he wrote the article.  I haven't looked into it myself, so I have no opinion right now.

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#10) On December 29, 2010 at 1:22 PM, Valyooo (99.42) wrote:

You read Joel Greenblatt's book, right?  Do you think Petrominerales could be subject to heavy selling?

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#11) On December 29, 2010 at 1:28 PM, TMFBabo (100.00) wrote:

@Valyooo: Greenblatt's book is near the top of my reading list, but I have not read it.  I've been learning as I go as far as special situations are concerned.  From what I've heard, I will love the book. 

I haven't read it yet because I've been busy reading Financial Shenanigans and Quality of Earnings (excellent reads and important for any investor to know the content of those two books).  Of the two, I thought Financial Shenanigans was more comprehensive, but there are sections in Quality of Earnings that definitely made it worth reading. 

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#12) On December 29, 2010 at 1:30 PM, portefeuille12 (25.10) wrote:

http://www.bloomberg.com/apps/quote?ticker=PBG:CN

http://www.bloomberg.com/apps/quote?ticker=PBEGF:US

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#13) On December 29, 2010 at 2:35 PM, Valyooo (99.42) wrote:

I just finished greenblatt's book yesterday. I loved it, but I definitely need to reread it a few times to beat it all into my head

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#14) On December 29, 2010 at 2:36 PM, Valyooo (99.42) wrote:

I just finished greenblatt's book yesterday. I loved it, but I definitely need to reread it a few times to beat it all into my head

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#15) On December 30, 2010 at 12:52 AM, TMFBabo (100.00) wrote:

I know what you mean about having to read it a few more times - I feel that way about some of the books I've read.  For learning in general, I think subject matter sinks in the best if you're exposed to it 3 times. 

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#16) On January 03, 2011 at 2:33 PM, mclinb3001 (< 20) wrote:

Thanks for the christmas gift! It just keeps on giving. Shoulda invested like 10k. Nice work!

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#17) On January 11, 2011 at 8:40 PM, vchelimella (< 20) wrote:

Is SVU still a worth holding any throughts appreciated

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#18) On January 12, 2011 at 8:31 AM, TMFBabo (100.00) wrote:

@vchelimella: Let me ask you: why do you own it? What's your investing thesis for SVU?

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#19) On January 12, 2011 at 12:03 PM, Pennyperson (< 20) wrote:

Babo

When is this article on natty gas/oil you've been working on coming out and where will I find it?

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#20) On January 12, 2011 at 12:25 PM, vchelimella (< 20) wrote:

I think its worth atleast $12 and i expect someone to scoop it at atleast 50% premium but i really want to know opinion on this Babo

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#21) On January 12, 2011 at 6:15 PM, TMFBabo (100.00) wrote:

Well, I'll say SVU isn't one of my more researched plays.  I've read a little on it and I think if they survive and pay down the upcoming debts, they will trade higher several years later than they are now.  I'm making the bet that they do pay down their debts and eventually trade higher.  I do not currently own it - it is just a CAPS pick. 

I don't really look for buy outs of my companies - I want them to be strong standalone investments.  The buy out at a premium is a bonus for me (I've never had one, by the way). 

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#22) On January 12, 2011 at 6:52 PM, TMFBabo (100.00) wrote:

@Pennyperson: I don't think I'll have time to do the additional research on it (what I want to do would take many more hours) - I have too many things I want to accomplish in my limited time: research new Big Short ideas, research and write about current Big Short and Alpha recommendations, some things for investor development, etc.

I'll post my incomplete version in the next week or two - I only touch up on some of the supply concerns.

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#23) On January 19, 2012 at 8:33 PM, clbjblk (< 20) wrote:

Nice at 8$ with monthly divy's that nobody beleives in Santa wait till 15 or 16$ and then wait for the two junior miners trying to get investment cash to mine some ree's that take a long time to pay off but will not make China's monoply on there export tax when PBKEF has to do nothing but get royalties on land they already made there money on,so much for the pipeline they will need a better way to transport the ree's. Fact not fiction if the miners investors go along with there northern most land,technoligy is sometimes hid well just like when you think it is not there and find out to late it was.

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