Tag: PBN

For other articles I have written about Petrobakken, you can click here.

A lot of people are asking “Why did Petrobakken go up 14% in a day?”.

The quick answer is because this is a classic short squeeze, fuelled by a cascade of stop orders taking the stock up higher.

We have the following 6-month graph:

Nearly everybody that has invested money in the company is sitting on a losing position. Conversely, those that were short Petrobakken are sitting on money. In order for short sellers to maintain their fraction of PBN, they must be able to add to their short positions. Short interest in PBN has been about 3 million shares since October and about 4.8 million shares in June. Short interest in Petrobank (which owns 59% of PBN) has also been proportionately higher, so one can’t automatically assume that the short position in PBN is hedging off ownership in PBG.

Eventually there has to be a spike as marginal short players have to cover their tracks – it is nearly impossible to tell when this happen, but when they do, the liquidation is swift and sharp:

PBN continues to trade above my fair value estimate and I will continue spectating as I have no position in this or PBG. My guess, from a trader’s perspective is that there is a good probability that we will see one other sharp spike up and then the shares will continue their steady descent down to fair value. The valuation mismatch between today and what it was a year ago, however, is much less than when the shares were trading at $25. The company also still has the material financial issue of figuring out how to spend more money and issuing dividends beyond the cash flow coming in.

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.

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.