Petrobank Energy & Res Ltd New Com (NASDAQOTH:PBEGD)

CAPS Rating: 4 out of 5

Recs

8
Player Avatar TMFBabo (100.00) Submitted: 12/29/2010 11:06:13 AM : Outperform Start Price: $2.17 PBEGD Score: -134.04

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 the 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.

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Member Avatar mclinb3001 (< 20) Submitted: 12/30/2010 9:32:35 PM
Recs: 0

I stumbled upon this (YOU) yesterday. Great info. In the end we should hold on to some of these for the long term? That what it looks like to me...you have much more experience. Please let me know your thoughts.

Member Avatar TMFBabo (100.00) Submitted: 12/31/2010 9:34:54 AM
Recs: 1

Before buying in, I'd evaluate Petrobakken and the oil sands extraction technology - I have done neither. It does seem like the sum of the parts is greater than the whole, though.

Member Avatar TMFBabo (100.00) Submitted: 12/31/2010 9:53:56 AM
Recs: 1

@mclinb3001: Sorry about my short response that didn't really answer whether you should hold this company long-term, but I believe my pitch should be used as a starting point only. Half the battle in trying to beat the market is getting new ideas - I'm just providing an idea that I think is above-average.

I fully believe anyone buying in should be evaluating this company based on whatever metrics and fundamentals he uses to evaluate oil and gas companies. I don't think "what that guy said" is a good reason to buy stocks - I see it happen the most with TMFUltraLong's stock picks and it makes me feel uneasy to see so many people buying into stocks because of "what TMFUltraLong said."

Member Avatar Merton123 (57.99) Submitted: 1/2/2011 3:13:55 AM
Recs: 0

I agree with TMF Babo that every investor should do their own research and not just buy because someone else said so. I looked at the volume of shares being traded for PBEGF.Pk - 12,585 shares is the volume. When you start looking at stocks with very low volume then you as the investor are taking on a huge risk. For example what is the minority share value of a local barber shop in town? Lets says the barber shop buys another barber shop (i.e., 100% earning growth) the minority share value is still $0 because finding someone else to buy that minority share from you is very difficult - pink sheets. The fundalmentals may be incredible but unless you are planning to buy the entire company and get control of the earning stream you may end up with a delisted company. I suggest treading very lightly in these waters. My preferance is to research the DOW 30 components where there is a large volume of the shares being traded of the stock for each given company. I don't have to worry about being able to sell my shares to somebody else at a later date. Yes the opportunity to make outsized gains are more limited in this area. On the other hand the risk of losing the entire investment if the company goes private is also minimized - - but that is just my own risk preferance. Mert

Member Avatar TMFBabo (100.00) Submitted: 1/2/2011 2:31:00 PM
Recs: 1

@mclinb3001: Now that I'm done with my ranting and raving, I'll answer your question. Sorry about all that from before - this is a sensitive topic for me because I don't like people buying up other people's CAPS suggestions without doing their own intensive research.

Petrobakken didn't strike me as significantly undervalued when I looked at the reserves situation on their investor presentation. The bigger deal here is the interests in the 670 million BOE - first off, what percentage of it is proved and what percentage is probable? The other thing to note is the oil sands extraction technology that Gurufocus article writer was excited about. I'd say you have to hold the shares for a while to unlock the value in there, but you have to be convinced oil will not drop - that would be very bad for most oil companies, including Petrobank which seems to have much more oil than gas.

The article link (given by portefeuille on my blog): http://www.gurufocus.com/news.php?id=109940

@Merton123: Very true - it is a pink sheet stock and it does have more potential risk. I do like, though, that PBG.TO (the Canadian listed shares) have about 518,000 shares traded (3 month avg. volume), which would make me feel a bit better. After US listed stocks, I am most comfortable with Canadian stocks - it's probably a combination of geographical proximity and the fact that the Canadians don't strike me as high on the fraudulence radar.

Member Avatar GVinvesting (94.39) Submitted: 8/15/2011 8:44:46 AM
Recs: 1

My thoughts on the matter, I was also early like everybody else.

https://www.gvinvesting.com/Canada_Reports.html

The heavy oil assets, which at one point last week where given a negative value by the market, will start bearing fruit in the second half of this year. I think in several years these assets could be valued higher than the current value of PBG's stake in PBN. Management has said they expect to spin off PBN in 2-5 years.

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