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When does $0 = $1,000,000,000?

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May 14, 2010 – Comments (0) | RELATED TICKERS: PWE

Question:

When does $0 = $1,000,000,000?

Answer:

When you're Penn West (PWE)

I have been a big fan of the Canadian oil and natural gas producer Penn West ever since its stock imploded during the infamous CANROY Halloween Massacre.  When valuing this company I always assign practically no value to its oil sands assets. I have never been a big fan of oil sands, which require extremely high oil prices to be profitable. Even after assigning a value of zero to its oil sands properties, I strongly believed that Penn West is extremely undervalued.

Well today the folks at PWE received an absolute gift from China in the form of $817 million in cash for 45% of the company's Peace River oil sands assets.  That's nearly a billion dollars on a company that only has a market cap of $8 billion for something that I ascribed no value to.

The sovereign wealth fund China Investment Corp. is forming a joint venture with Penn West to develop these oil sands resources. In addition to buying nearly half of these assets, CIC is funding its development by purchasing 5% of PWE's outstanding shares for $435 million. I'm not wild about this dilution for a price that I consider to be too cheap, but I can live with it given the other aspect of this deal.  This cash will give Penn West the money that it needs to significantly ramp up its production and growth, which it plans to do when it converts to a normal corporation likely later this year.  

Any money that the oil sands venture is just icing on the cake for Penn West as it continues to develop its strong portfolio of light oil and natural gas deposits.

China to invest more than $1B in Penn West deal

China pumps another $1 billion into Canadian oilsands with Penn West deal 

Deej

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