Petrobakken Q3-2011: Still burning cash

One anonymous bullish person on Petrobakken (TSX: PBN) posted the following comment upon the release of PBN’s third quarter report:

The only thing you can say about PBN’s results is: outstanding.

This was a big time turn-around from 2Q spring breakup.

They are already at 47,500 per day and expect to exit 2011 at over 49,000 per day (49k was their previous year end exit number, so this is a production beat and raise). BMO’s analyst was at 39k. How wrong he is.

Assuming a go-forward production rate of approximately 49,000 boepd (87% oil weighted), the estimated discretionary cash flow would be approximately $905 million in 2012, assuming US$90 WTI, foreign exchange of 0.975, AECO CDN$3.50 and a 5% differential. A $10 change in oil = $100MM change in cash flow.

Analysts are expecting this year’s $900MM capital program to be repeated next year… Management gave hints it might be much less (perhaps ~$500MM). This which would mean FCF could be $400MM or more. So much for their balance sheet problems.

Their covenants are easily being met.

Looks like the cross-over point when cash flow will meet spending needs + dividends will be sometime in 2012 (based on $90 oil and reasonable production growth).

Three wells have been drilled in the new plays and they aren’t saying much. That is a good sign.

@Kevin @Sacha – you still have time to reverse course. I would suggest it’s much better to focus on this deep value opportunity than Yellow Media or BAC. Poor souls.

I’m not sure whether we were reading the same quarterly report or not. Average bopde for the first 9 months of the fiscal year is down 8% from 2010 to 2011 (page 10); the emphasis on “estimated” or “current” production is relatively meaningless unless if such production can be sustained – and if so, at what capital cost? Reading the report, Q4’s capex is going to be yet again over operating cash flow.

Average WTIC in CDN$ was up 16% on average from 2010 to 2011, which is a boost to the company’s results – there is no doubt whatsoever that high oil prices will assist Petrobakken, along with any other crude production company. Despite the production drop, this price gain in WTIC increased the revenue intake. Indeed, crude price rises will be their only real way for salvation – if they experience drops in crude pricing, it will be financially very damaging below a certain point.

Now it could be the case that Israel does an air strike on Iran and crude oil spikes – getting lucky with Deus Ex Machina is one way of realizing investment gains.

Cash outflow (primarily through capital expenditures) was about $106M over operational cash flows – add another $45M in dividends out the door in the quarter means the company digs another $151M deeper into its bank facility – they will be forced to slow down capital expenditures as they are running up against their bank credit line and also have to face the issue with the put they sold on their US$750M debenture issue (February 2013). When the capital expenditure spigot stops – how quickly will that production fade? We’ll find out pretty soon.

No positions in PBN, nor will I be creating any.

11 thoughts on “Petrobakken Q3-2011: Still burning cash”

  1. Let’s be a little more intellectually honest, shall we?

    The rebuttal in your very first paragraph is backward looking. Why are you penalizing PBN for the worst spring breakup in a century and writing about it like it’s a normal situation? Be intellectually honest and look at what they can produce in normal periods like Q3.

    Your second point about capital cost and production has already been answered by me. A month ago, I wrote:

    “If you look at it your way, they need to add 1,500 boe/d per month to maintain their current production. That’s 6 new wells per month. At $3MM per well (that’s probably high), that’s $18MM per month or $216MM / year.”

    So, doing simple math that’s $900MM cash flow – $220MM capex = $680MM FCF while maintaining current production (they have over 10 years of inventory, so this can continue making $680MM in FCF for a long time).

    But let’s look at this another way… let’s assume they have $0 capex. What will production look like over the next 2 years? Here’s the math:

    50,000 boe/d exit rate 2011 @ 35% decline = 32,500 boe/d YE12 for an average of 41,000 boe/d.
    32,500 boe/d exit rate 2012 @ 25% decline = 24,000 boe/d for an average of 28,000 boe/d.

    At that point, decline happens much more gradually. So what’s that worth to PBN?

    2012: 41,000 boe/d x 365 days x $50 net back = $750MM
    2013: 28,000 boe/d x 365 days x $50 net back = $511MM

    Then, for the next decade, shareholders get over $400MM per year in cash flow.

    Finally, let’s look at it as if the company will continue to operate as is. The cross-over point when cash flow will meet capital spending needs and dividends will be sometime in 2012 (based on $90 oil and reasonable production growth).

    Sacha – this is the math and the intellectually honest way to look at PBN. You can argue all you want about the assumed netback, but that would be a stupid argument that no one can win. I sure do hope you stop being so backward looking in your views like you have here. If you start looking forward a bit, you’ll be able to avoid the value traps like Yellow Media.

  2. We disagree on assumptions. Your math makes PBN sound like a $25 stock, but it is not.

    What I find funny is that you are slamming me about Yellow Media, but I’m sitting on unrealized gains. Bet you can’t say the same for PBN. YLO isn’t a value trap, it is outright gambling at this point with high risk, and even higher reward if they get it right. PBN is purely an expensive leveraged play on crude prices. I’d classify it as a medium-high risk for relative low-medium reward.

  3. Are we back to this game where you make some largely inaccurate valuation statement and then say you, “won’t give the fair value for free”?

    How ridiculous is that? You and that guy Kevin Graham are a lot alike… all fiction, no facts.

  4. Good. I hope you make a fortune on PBN.

    I’d be more inclined to continue this on a more serious basis if you weren’t anonymous.

  5. So my anonymity precludes you from backing up your statements with facts / real analysis? That makes no sense.

    I’m an investor and CFA Charterholder and work at a value hedge fund. What more do you need to know?

  6. You are losing serious credibility Sacha… I found your blog through Bronte (John mentioned you in a post once). And it’s for that reason alone that I felt we could have an intellectual back-and-forth on the merits of this investment. But I have realized I’m arguing with an intellectual midget. My mistake.

  7. Again, my name has nothing to do with the merits of investing in PBN. You’d be better served to do good research, write sound articles focusing on your assumptions and let people judge for themselves. Or you can continue to do what you’re doing and stay mediocre.

  8. Wow, I really think you should start your own website. It’s amazing how many people are too scared to put their name behind their opinions.

    Oh, sorry, I forgot, you claim to be a CFA and work at a value hedge fund. Forget about it.

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