I wrote earlier about how Petrobakken (TSX: PBN) was a value trap. After PBN reported their first quarter results, my assessment has not changed that much.
Serious investors will just look at their financials, but you can also look at their press release.
The most salient point (and note that this analysis is not exhaustive by any stretch of the imagination – I will leave it to the reader to punch holes in this summary assessment) is that the company has maintained their production at around 41,500 barrels of oil equivalent per day. However, in order to maintain this production they needed to spend about $300 million in the quarter in capital expenditures. Operationally, the company did roughly $140 million in cash, so when you subtract another $45 million out in dividends, you are left with a negative $200 million cash flow quarter.
The company is expecting to spend another $600 million in capital expenditures this year. Doing some paper napkin calculations, if you assume for the rest of the year the company will be able to maintain a rough $150M/quarter operating cash flow, a $45M/quarter dividend rate, and $200M/quarter capital expenditure rate, you are still net negative $315M cash. Their bank facility has about $240M room left. The difference in cash is a $75M gap.
If they get lucky, they can bridge this gap with increases in revenues from increased crude and gas prices or an increase in production (via drilling new wells), but their margin of error is tight. The only other realistic option that management has (since I do not foresee them doing another debt financing) is cutting their dividend.
Anybody investing in PBN for yield is going to receive a nasty shock if this occurs. Petrobakken shares do have value, but I believe they are still trading above their fair value.
I think your back-of-the-envelope calculation is a pretty fair assessment.
But I see two possible ‘solutions’ for the company (you alluded to one of them).
First, if oil prices do moderate for the remainder of the year, management could pull back on some of the $600M CapEx plans, and spend less in 2011.
Secondly, they could take on more debt. You say you don’t foresee them doing this, but it looks to me like the balance sheet is in ok shape (not great, but enough to take on another $500M or so of debt). Interest rates are still extremely favorable, and if they were forced to take on debt because of lower gas prices, that environment would probably include even lower interest rates.