Category: Equity

Petrobakken – Bank Debt – Due 2012?

Investors in Petrobakken (TSX: PBN) are continuing to discover why yield is not something that should be chased lightly – although they are probably looking at their 6.7% current yield on the $14.27 share price are feeling smug, the approximate 36% depreciation in share price over the past year is something they likely would have not wanted in conjunction.

The latest news out of Petrobakken is something they didn’t announce. Specifically, the following comes from their last quarterly financial release (for the 3 months ended March 31, 2011):

Note 9 – Bank Debt
The Company maintains a covenant based revolving credit facility with a syndicate of banks. The facility’s lending amount has a borrowing capacity of $1.2 billion. The current term for the facility ends June 3, 2011 and can be extended by the lenders for an additional year. If the lenders were not to extend the term, the drawn amount would become due on June 3, 2012. The credit facility bears interest at the prime rate plus a margin based on a sliding scale ratio of PetroBakken’s debt to earnings before interest, depletion, depreciation and amortization (“EBITDA”). The facility is secured by a $2.0 billion demand debenture and a securities pledge of Company’s assets.

June 3 has come and is nearly three weeks past. No extension of the credit facility has been announced so it is probable that the $966 million in bank debt (which will be higher for the second quarter financial release) will be called on June 2012. So this means that the clock has started for PBN to shop around for a billion dollars of financing – will they sell more debt? Or will they give the banks some more interest?

In terms of the rate that is being charged by the banks for the facility:

The applicable margin charged by the bank is based on a sliding scale ratio of PetroBakken’s debt to earnings before interest, taxes, depletion, depreciation and amortization (“EBITDA”). The facility is secured by a $2.0 billion demand debenture and a securities pledge on the Company’s assets. The credit facility has financial covenants that limit the ratio of secured debt to EBITDA to 3:1, limit the ratio of total debt (total debt defined as facility debt plus the value of outstanding debentures in Canadian dollars) to EBITDA to 4:1, and limit secured debt to 50% of total liabilities plus total equity. The Company is in compliance with all of these covenants.

I couldn’t find explicitly what the rates were from the financial statements, but doing some arithmetic on the 2010 annual financial statements and subtracting the interest they paid from their US$750M convertible debenture issue, I believe Petrobakken paid prime (3%) for their bank debt in 2010.

You can be sure that the banks want something more than prime for this round of financing – if the renewed credit facility charges prime plus 100bps, this will be another $10M/year in pre-tax cash that will be going out the window for PBN shareholders as the cheap financing dries up.

Petrobakken continues to remain on my radar, but as I stated in my “value trap” article, even at present valuations I will not be touching it. My guess continues to be that we will see a dividend cut or even floating a very unattractive (for them) equity financing in conjunction with a renewal of the credit facility. PBN still has a market capitalization of $2.6 billion and they could sell off 10-15% of the company and raise roughly $250-$500M which would reduce the debt-to-equity and keep their costs of borrowing at prime-like rates.

Markets in a brief rally mode

As much as I despise technical analysis, the following short-term pattern on the S&P 500 chart came to mind and is probably on the minds of technical traders out there:

It would suggest that we would see another couple percent of gain in the S&P 500 before this stalls out (to around the 1310-1320 level).

It is my opinion that we continue to be in a range-bound market and that index investors are not going to be making money on their investments. In order to seek outsized returns, you must be able to look at smaller cap companies, but these come with larger risks.

The dangers of technology investing

Shareholders of Research in Motion (TSX: RIM) are likely feeling a lot lighter in the pocket from three months ago. I don’t have any comments on the valuation of the company other than that the market weights future performance than past performance – RIM over the past reported about $6/share in earnings and when combined with their $27 share price makes the company look like a spectacular value. Even when looking at the analyst estimates, most are projecting they will make $6/share for the next couple years.

The truth, however, is not so simple – the company is facing intense competition through a couple channels – Apple with their iPhone/iPad and Google’s Android operating system embedded on a myriad of devices that are chipping away at Blackberry. As shareholders of Nokia (NYSE: NOK) might know, when you give up a lead in technology, it may be permanent or at least very long.

In the “social networking” domain, Friendster was trumped by Myspace, and now Myspace has been trounced by Facebook. Predicting the evolution of technology is not easy.

In the “search” domain (i.e. online advertising), Google so far is the winner, with old players such as Lycos, Excite, Infoseek, Altavista and Yahoo left behind.

Microsoft, for the most part, appears relatively insulated from the change in technological trends, mainly due to people’s acclimatization to the Windows and Office suites. Linux’s various permutations has failed to permeate into the client marketplace to a significant degree while OpenOffice and its derivation (including Google Docs) has not penetrated Microsoft Office to any extent. However, a bet on Microsoft relies on the fact that these two core assumptions are true. While Microsoft does have a financially viable video game division, this is not the primary bet a Microsoft shareholder implicitly makes – rather, it is that they are able to maintain monopoly-level pricing on Windows and Office.

Apple shareholders also received adverse treatment from Microsoft back in the 1990’s and nearly faded into oblivion until they revamped their product marketing with the iMac. The question of 2012 is: Will Apple or Google shareholders receive the same treatment from some other upstart company?

Finally, with RIM, if you anticipate that people will be using Blackberries (or other RIM devices) in the future, RIM might be a good bet. Investors with clairvoyant abilities to predict future technological trends will be handsomely rewarded with either gains, or the ability to sell out of a stock before the rest of the market realizes that the technology trend has changed.

How will OPTI restructure?

OPTI Canada (TSX: OPC) is an oil sands producer that is facing insolvency. They have $2.6 billion in debt and they have failed to make an interest payment on their secured notes.

Suffice to say, the equity is trading in anticipation of it becoming worthless (presently 10 cents per share, which is about 9.99 cents over-valued at present).

The company has first-lien notes which as the name suggests, is a first claim on the assets of the company. Those bonds (US$825M face value outstanding) are trading at nearly par. The senior secured notes ($1.75B outstanding) are second in line and are trading at 40 cents on the dollar. Senior to all of this is a $165M line of credit.

OPTI obviously has leveraged themselves too deeply and their shareholders will be taking a large bath on their investments. The question is how the company is going to get carved up, with the first lien debtholders having the trump card – they will negotiate the senior secured noteholders a deal to salvage some value for them to expedite the uncertainty caused by creditor protection.

For retail shareholders, probably the best thing for them to do is to sell their shares, take a capital loss, and get on with life. If the company formally declares bankruptcy, the shares will be halted on the TSX and it will become much more difficult to dispose of the security and take the loss.

Armtec Infrastructure

You would think the way that Armtec Infrastructure (TSX: ARF) has been trading over the past week that it was a Chinese company that was embroiled in a huge fraud allegation, but alas, the story is much more simple: bad business performance. The company’s Q1 report also came with an announcement they were cutting their dividend to zero.

The company has two main divisions, one dealing with products and one dealing with the services that sell the products. The products and services are for the construction and maintenance of various infrastructure-related projects in the public and private sector. The company’s revenues are broadly based across Canada.

Financially, Armtec formerly traded as an income trust and converted to a corporation. Its capitalization was primarily funded with debt (once you subtract intangible and goodwill from equity). The company has had a very rough 2010 and 2011 to date.

Probably the best recent decision management made was when they did a bought deal financing (of equity), selling about 3.6 million shares for $16.20 a piece on April 13, 2011 – which you can now buy for 75% less! This raised about $50 million in net proceeds for the company, which they used to pay down their line of credit – their debt at the end of March 2011 was $290 million, and this will be about $50 million less. You also wonder how much due diligence those investors that paid $16.20 a pop did on the company – it has been a continual slide downhill leading up to last week’s catastrophic result.

I am not going to comment too much on valuation since my investigation is still ongoing, but there could be value in the company – either the equity or convertible debentures. You would have to determine whether the company can get back to the profitability it had back in 2008-2009 (where they were delivering considerable operating income) or whether the current state is more likely. For example – how much was this company aided by the stimulus package by government?

This is also a small lesson for people investing in companies that are heavily leveraged and mainly give out cash – any hiccup in the operation and the financial state of the company becomes a much more dominant concern than the operational performance. Armtec is facing loan covenant violations which it will have to renegotiate, likely to the detriment of shareholders.