On December 13, 2011, Petrobakken (TSX: PBN) released more information with respect to their 2012 plans and numbers.
The two salient snippets are as follows:
We are also pleased to announce our initial capital plan for 2012, which allow us to build on our 2011 operational success. We anticipate capital development expenditures of approximately $700 million, primarily focused on horizontal drilling and completions, predominantly in the Bakken and Cardium light oil plays. We expect that this drilling-focused activity will generate a 2012 exit production rate of between 50,000 and 54,000 boepd. Our estimated year-over-year average production growth will exceed 15%, on an absolute and per-share basis. We expect this initial 2012 program to be executed entirely from funds from operations, with surplus cash flow available to fund dividends and debt repayment.
For 2012 we estimate that our corporate base decline rate will be in the range of 30-35%. In 2010, our base production declined approximately 40%, while the 2011 base decline rate is now forecast at approximately 35%. We have been encouraged by the results of our recently completed wells, and we are also beginning to see the benefit of the continued maturation of our producing assets with a significant proportion of our production now coming from older, shallower decline, horizontal wells.
…
As part of our ongoing balance sheet management, and to reward continuing support from existing shareholders, we are pleased to announce the implementation of a DRIP. The DRIP provides eligible holders of common shares resident in Canada the opportunity to reinvest their monthly cash dividends in PetroBakken shares at a 5% discount to the then current market prices. Petrobank (59% shareholder of the Company) has indicated an intention to participate in the DRIP with respect to 50% of their PetroBakken shares, which will amount to $53 million in additional liquidity to the Company on an annual basis. Subject to the receipt of approval of the Toronto Stock Exchange, the DRIP will be implemented for the January 2012 dividend, which is payable in mid-February 2012. Additional information regarding the DRIP can be found below.
The company is planning on spending $700M in capex in 2012, which is a decrease from projected 2011 capex numbers of $900M. The capital budget for 2012 will be slightly below their operating cash flow for the year, assuming current oil prices remain steady (a 12-month extrapolation of 2011 figures for the first nine months is $650M, noting that WTIC prices were lower then than they are now).
It still leaves one wondering when the company is actually going to generate significant amounts of cash in excess of capital expenditures – when you add the $180M of dividends projected in 2012 (minus the ~$53M that Petrobank will re-invest for Petrobakken equity), it does not leave much for them to pay off their February 2013 debenture, which holders have a one-day put option to redeem (and given the small coupon and the credit profile of the company, they most certainly will unless if there is a sweetener given to them in the interim).
The DRIP decision in itself is rather interesting – it effectively starves half the cash flow that Petrobank will receive from Petrobakken in exchange for further equity. Since Petrobank owns 59% of Petrobakken, it will result in Petrobank foregoing $53M/year in dividends in exchange for further equity. Assuming a $13/share price for Petrobakken, this will mean Petrobakken will issue 4.3M shares to Petrobank over 2012 – a cost of capital of 7.8% for Petrobakken, assuming the dividend is not cut. This is expensive capital for the company.
The company has hedged a significant amount of oil (20,000 boepd, about 40% of its expected production) with existing high prices which I think is a smart decision. Still, they are extremely leveraged and their only salvation is continued high oil prices. If there is any significant contraction in the price of oil, they will be in clear financial difficulty, especially when it comes to negotiating with the $750M debenture that is effectively due in February of 2013.
Petrobakken is still oversold, and if you were to compare it to Daylight Energy, a situated company in terms of assets and leverage, a company for which I also just received tender from Sinopec, it would probably easily sell for at least $24-28 per share. But I was unhappy with the sale of Daylight, except that it did provide some much needed liquidity and deleveraging in my portfolio. The reason is that the oil in ground is still far more valuable by several multiples than the market cap of the company.
This would seem to alleviate many of the concerns around PBN’s liquidity:
http://valueinvestorcanada.blogspot.com/2012/01/petrobakken-issues-900-million-in-notes.html
What is he missing, if anything?
If nothing, then PBN is pretty compelling.
I said that daylight was a “situated” company. That’s silly. I meant to say “similar” company.
Management is striking the iron while it is hot and I think it is a good move on their part to partially tender the February 2013 bonds, if not redeem them entirely. They did not receive ideal pricing on their subsequent note offering, at 8.625% for an 8 year maturity. This is expensive capital – their interest profile will increase about 55 million pre-tax when the rollover is finally finished – about 22 cents a share after-tax that could have gone to something else (e.g. dividends).
At $100/barrel, they will be able to service this, but the leverage becomes quite uncomfortable when you project any decreases in crude pricing. This has been, and always will be a leveraged play on the price of crude.
Sacha Peter:
Good point. Yet what will bring the price of crude down? Bernanke’s promise to keep interest rates low until 2015?
Also, one shouldn’t invest in commodities with out the basic understanding that the underlying commodity has a strong effect on the profitability of a company. Also, are you sure that PBN is not a viable company at 80 per barrel or even 60 per barrel?
I don’t have enough wisdom to figure out whether crude goes up or down from here, but if you put the gun to my head and asked to pick a direction, I would say down in the intermediate term.
Barely at 80 and no to 60 is my quick answer to your last question. Management was also smart to do more cashless collars on their production and should be seriously thinking of hedging even more.
Before anybody says “There’s no way crude can go down 40%!”, I will just point out that the past two years in the oil market have been remarkably unvolatile, and they can look at things like silver and such.
Of course the extension of the zero rate policy will goose up commodities in the short term, but the markets are already pretty goosed as is. Reminds me of the economic equivalent of a heroin addict taking a higher dose to get a lesser high.