While I have been losing a small amount of money on Yellow Media’s preferred shares jaunt to zero, fortunately I have steered far away from Petrobakken (TSX: PBN) which I have written here many times before.
They will not have an easy time renewing their credit facility which expires on June 3, 2012. The debtors are clearly in control of this one, just like how they are in control of Yellow Media. There is $1.14 billion in bank debt at the June 30, 2011 quarterly report. Another looming timeline is a US$750M debenture which holders have a put right – they give notice in December 2012 and the company must redeem at February 8, 2013.
(Update, September 29, 2011: Apparently they managed to renew their credit facility with an extra $150M in the facility… oops! This was announced in their Q2 financial update, which completely escaped me – this kind of blows a hole in the immediacy of cutting the dividend in the subsequent analysis, but there still remains a significant debt renewal of US$750M that will be taking place in February 2013).
From the MD&A, August 9, 2011:
As at June 30, 2011, PetroBakken had $1.14 billion of bank debt drawn on our $1.35 billion credit facility. Our credit facility is with a syndicate of banks and has a maturity date of June 2, 2014. The amount of the facility is based on, among other things, reserves, results from operations, current and forecasted commodity prices and the current economic environment. The credit facility provides that advances may be made by way of direct advances, banker’s acceptances, or standby letters of credit/guarantees. Direct advances bear interest at the bank’s prime lending rate plus an applicable margin for Canadian dollar advances, and at the bank’s US base rate plus an applicable margin for US dollar advances. 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.
The TTM EBITDA is $659M, thus they are comfortably in compliance with this ratio. You would think the banks would be slightly uncomfortable with lending this much money in a company that is so heavy on capital expenditures.
My immediate guess is that the company will have to seriously curtail, if not outright suspend their dividend until such a time they are able to repay a substantial portion of their credit facility. This is not news to me – I had predicted this in May of 2011.
Another course of action they will likely implement is a slowdown of their capital expenditures. The only consequence of this, however, is that they will not be able to keep up their production levels, which their wells strongly taper off after the first year of drilling. This in turn will hinder their financial results.
The company is also highly sensitive to the price of oil and the past six months of WTIC trading has not helped their cause any.
Even though PBN has been sent down over 50% over the past couple months, it is still trading above my fair value.
What is your fair value for the stock and what is it based on (e.g., assets, ev/dacf,etc)?
I won’t give the fair value for free, but the calculation is based on an extrapolation of cash flows, expected future capital expenditures, depletion rates, and determining a terminal value for the equity holders given the existing debt.
Realize that there isn’t much point in operating a company that generates a million a year in operating cash flow if it takes a million per year in capital expenditures to maintain it.
Let’s put it this way, today’s closing market value of $1.2B is more attractive than the $1.8B a week ago. Unlike Yellow Media, PBN is producing an asset that can actually be sold. (this was mildly sarcastic).
The fact that you bet on Yellow Media begs the question, what is the fair value of your opinion? (also, mildly sarcastic).
At the rate that Yellow Media is going, pennies a share!
You’re not explaining your fair value unless you’re paid? That’s silly.
Have you looked at transactions in the Western Canadian Basin to determine a value of PBN and then compared that to the Enterprise Value of the PBN? If you’ve done that work, you’ll find PBN is trading at 20% of book value. This is not a financial company with SPVs where there’s derivative / counterparty risk. This is a company that – were they to stop CapEx completely – would make $600MM+ in cash flow (assuming current strip). A company that can actually make money trading at 20% of book is undervalued.
No need to pay for my work.
Oh, you’re asking about PBN? Their BV is $3.46B, very curious to know how you arrived at “trading at 20% of book”.
Even then, you have to adjust BV for intangibles, e.g. $1.5B Goodwill, and very, very carefully examine the $4.44B of capitalized expenses (exploration and PP+E).
But then again, if it is a screaming value as you say it is, just buy some shares of PBN and see how it works for you.
You can’t blindly look at the balance sheet. You have to spend some time understanding their assets and doing due diligence on recent precedent transactions. That’s what value investors do – find value where others miss it.
Can’t find fault with your last statement. Value investors also find the opposite of value where others miss it as well and steer clear.
PBN’s valuation is not as ridiculously priced as it was in the past, but it is still expensive.
Makes you wonder how PBG will handle the situation when their only cash cow can’t keep dishing out those distributions for too much longer.
JV May River. Problem solved.