Wednesday, June 30, 2010

Petrobank - Clearly Undervalued with a free lottery ticket

I spend a lot of time looking at different publicly traded securities. Every once in a while an undervalued opportunity is just very obvious.

I think Petrobank is such an opportunity. Here is a quick summary and I will follow up with later posts with more detail.

Petrobank has 4 main assets

1)110,240,000 shares of Petrobakken that currently trade for $21.50 which therefore have a market value of $2.37bil.

2) 65,720,000 shares of Petrominerales that currently trade for $24.52 which therefore have a market value of 1.66bil

Now stop there for a second. Those two together equal $4.02bil. Petrobank's current market cap is 106,000,000 x 38 = 4.04bil. So in other words, you buy Petrobank today and you are paying for the value of Petrobank's Petrobakken and Petrominerales holdings. Both of which are I think very undervalued on their own, so even that is a pretty good deal.

But what do you get for free ?

3) Petrobank's heavy oil division which has a PV value of $3.3bil of 2P and contingent reserves (that is $31 per share).

4) Petrobank's THAI technology which is patented and appears will allow for huge advances in amount of oil that can be recovered in heavy oil reserves. This the real wildcard as it has the potential to be worth billions. The nice part is that you pay nothing for it in the current share price.

So for $38 per Petrobank share today you get

1) $38 worth of Petrobakken and Petrominerales both of which appear considerably undervalued
2) $30 of heavy oil assets
3) Wildcard THAI technology that could be worth more than the the other 3 parts combined.

I'll put together some valuation work on all 4 parts individually

Tuesday, June 29, 2010

Inverview with Petrobank CEO

Petrobank THAI technology

Interesting article on this.

From what I can tell. You buy Petrobank at today's price and you basically are just paying the current market prices of both Petrobakken and Petrominerales. And both of these are undervalued in my opinion.

You pay nothing for this THAI technology which could be hugely valuable and nothing for the heavy oil business unit that has reserves comparable to Petrobakken and Petrominerales combined.

Sunday, June 27, 2010

Sprott Resource Corp - Cheap, safe, liquid, ready for opportunity

My favorite current investment opportunity. I have a moderate position and am hoping to add at even better prices.

I'll keep this short and sweet as I think this one is a pretty obvious opportunity.

The company is run by Sprott Asset Management which is perhaps Canada's best known hedge fund management group. They formed Sprott Resource Corp to take advantage of Sprott's deal flow. So far they have done a masterful job with a couple of great opportunistic investments.

I'll write more later, but for now I'd just like to get to the current valuation which is really quite simple and appealing.

Here is what Sprott Resource Corp currently owns:

One Earth Farms - $27.5mil (at amount invested)
Orion Oil and Gas - $233mil (publicly traded shares x share price)
Stonegate Agricom - $75mil (publicly traded, Sprott just took public)
Waseca Energy - $44.3mil (at amount invested)
Gov't Treasury Bills - $81mil
Gold and silver - $75mil
Portfolio investments - $41mil

Total value investments - $578mil

Shares outstanding - 99million

Value per share - $5.85

Current share price - $4.20

Upside from share price to value per share = 39.2%

So a pretty obvious value when you consider that we are using either publicly traded security prices, cash, and gold/silver to determine most of the asset value. Pretty objective calculation really.

It gets even more interesting when you consider that the private investments that we have valued at cost (One Earth and Waseca) are both likely worth much more than cost. And when you consider that Orion is also likely quite undervalued.

Also consideration should be given to the fact that Sprott will find a useful place for all of the cash and gold/silver they are sitting on. Consider that they invested $100mil in Orion in the fall of 09 and it is now worth $233mil. They hit a similar homerun with PBS coals in 2008 into which they invested $55mil and sold it later for $200mil.

Bottom line. These guys are excellent investors. The stock is cheap. It is safe with loads of cash and no debt. And there is plenty of upside in the value of their other private investments.

I will follow up on this with more detail about each investment and a more detailed valuation.

Hornbeck vs Salazar Judge Memo on Lifting Ban

Friday, June 25, 2010

Petrobank - owns two undervalued securities plus other assets

I recently started in on Petrobakken. Detailed a few points here.

Then moved briefly into Petrominerales. And now taking the next step and looking at the parent of the two Petrobank.

I'm still working and will document for readers, but I feel pretty comfortable that both Petrobakken and Petrominerales are undervalued.

Here is what Petrobank owns. Each PBG share owns:

1.04 shares of Petrobakken @ 23 = $23

.64 shares of Petrominerales @ $27 = 17

Total is $40

Current share price of PBG is $40

But that is not all. PBG owns 100% of Whitesands which is Petrobank's heavy oil business unit that owns a best estimate contingent rerecoverable bitumen resource of 670 million barrels.

Per the most recent company slideshow the PV10 value of Petrobank's share of Petrobakken and Petrominerales is about $3.5bil. The PV10 value of it's HBU is also about $3.5bil.

So very rough estimate. Petrobank owns $40 per share of public securites in PBN and PMG, then with the same PV10 it would also own about $40 per share of HBU. That would be about $80 per share vs the current share price of $40.

But there is more. The also own a potentially very valuable THAI technology that may be a breakthrough on significant improvement on bitumen upgrading.

And don't forget that both Petrobakken and Petrominerales appear quite undervalued and that both have significant growth in front of them.

I will be delving deeper into these companies.

ATP - Breach of contract an issue in gov't decision on liability cap

Senate Committee Wrestles With Oil Spill Liability Issues
The Justice Department, which would need to defend any new law, is already anticipating breach-of-contract claims
David Ingram

The National Law Journal
June 09, 2010

W. Jackson Coleman, managing partner of EnergyNorthAmerica, said that if successful, those breach-of-contract claims could cost the federal government billions of dollars in payments to the oil and gas industry.

Coleman testified at a hearing of the Senate Judiciary Committee, which is considering legislation to lift limits on damage awards. A former lawyer for the Interior Department and for Republicans on the House Committee on Natural Resources, Coleman said the drilling leases purchased by oil and gas companies are contracts with the federal government, and that the contracts were signed with certain expectations about liability.

He said there is ample precedent for companies to sue when the federal government changes the terms of those leases.

In 2000, for example, the U.S. Supreme Court ruled that the federal government had to return $158 million to Mobil Oil Exploration & Producing Southeast Inc. and Marathon Oil Co. after Congress passed a law limiting drilling off the Outer Banks of North Carolina. Justice Stephen Breyer wrote for an 8-1 majority in the case, Mobil Oil Exploration v. United States. Coleman worked on the case when it was before the U.S. Court of Federal Claims and he was at the Interior Department.

"In the Gulf of Mexico alone, there are currently over 6,600 oil and gas leases covering 35 million acres that were bought for an average of about $300 per acre in recent years," Coleman said in written testimony.

"By committing a breach of contract on its Gulf of Mexico leases," he added, "the federal government would expose the American public to far more than $10 billion in claims from current leaseholders, not counting likely claims for lost profits. An additional $3 billion would be at risk for leases bought offshore Alaska."

A second witness Tuesday echoed that argument in live testimony. Thomas Galligan Jr., the president of Colby Sawyer College and a specialist in maritime tort law, said he was concerned that changes to liability laws could "open up the United States to enormous damages." He later cautioned that he is not an expert in contract law.

Sen. Amy Klobuchar, D-Minn., was among several senators who expressed anger at the possibility of payments to leaseholders. "Who do you think is going to pay?" she asked.

One possible defense for the government could be found in the Oil Pollution Act of 1990 (pdf). Sen. Russ Feingold, D-Wis., noted at Tuesday's hearing that the act attempts to preserve the federal government's authority "to impose additional liability or additional requirements" related to oil spills. However, a report from the Congressional Research Service warns that the provision could be construed narrowly and not apply here.

The Justice Department, which would need to defend any new law, is already anticipating breach-of-contract claims. Associate Attorney General Thomas Perrelli raised such claims as a possibility -- in addition to claims based on the constitutionality of retroactive laws -- in testimony May 25 before the Senate Committee on Energy and Natural Resources.

BP PLC officials have promised to pay "all legitimate claims" in connection with the Gulf Coast oil spill, and federal law requires those responsible for the spill to pay all clean-up costs. But the law limits payments for some claims to $75 million.

Christopher Jones of Baton Rouge, La., whose brother died after the explosion on the Deepwater Horizon oil rig, testified Tuesday that his brother's family is entitled under current law only to pecuniary damages from the responsible parties.

"While some, but certainly not all, of these same parties express their sympathies, and claim to want to do the 'right thing,' they can hide behind the law and say they are protected from doing any more," Jones said.

Thursday, June 24, 2010

ATP - secures additional $150mil senior term loan

ATP put itself into a little better position today. Press release below.

Basically they replaced a $100mil undrawn revolver that had restrictive covenants with $150mil senior term loan that doesn't. As ATP grows ACNTA value going forward this facility can increase to $500mil.

Now my understanding after having a brief conversation with a company rep is that this financing is totally separate from the future Titan and Octabouy financings which will have them carved out and put into non-recourse subs.

It sounds like the Titan deal is still very much a go and isn't a million miles away from being done. Wish I'd had the guts at $8.20 to load up a little more. With the moratorium off and perhaps having little impact to ATP when put back on (Salazar comments about exempting development wells) things are looking better for ATP.

ATP Secures $150 Million Senior Term Loan and Option for Additional $350 Million Loan
HOUSTON, Jun 24, 2010 (BUSINESS WIRE) --ATP Oil & Gas Corporation (NASDAQ: ATPG) today announced that it has priced a new $150 million First Lien Senior Secured Term Loan facility. The facility replaces the existing undrawn $100 million revolving credit facility and additionally provides an option to increase the first lien loan by up to an additional $350 million (for a total of $500 million) as the company's Adjusted Consolidated Net Tangible Assets value grows. The facility matures October 15, 2014 and carries an annual coupon of 11%. Other features include the elimination of financial maintenance covenants and the ability to reinvest within one year 100% of asset sale proceeds into future developments. Closing, which is anticipated no later than June 30, 2010, is conditional on normal closing documents and deliverables.

Chairman and CEO T. Paul Bulmahn stated, "With this new facility, ATP has added more liquidity, flexibility and extended the maturity of its first lien debt. This structure, which is free of financial maintenance covenants, provides the necessary flexibility for us to focus on developing oil and gas assets and creating shareholder value. In addition, the facility offers provisions to expand it incrementally by $350 million which would increase the size of the loan to $500 million as the value of our assets grow. ATP is financially stronger today to capitalize on opportunities that should arise due to the adversity and challenges currently facing the offshore oil and gas industry."

Petrominerales - Analyst report

One nice thing about writing publicly about investments is the feedback you get from other investors.

I got a fairly interesting message from a long time follower of PBG (65% owner of PBN) who suggested that both PBG and it's other publicly traded company PMG are better investments.

Here is an analyst report that provides a good start to PMG.

Petrobakken - Q1 Earnings call

Link to the most recent quarterly call.


Management believes the recent bilateral wells are actually outperforming what the reserve engineers had expected (thus reserves should be increased).

First and second questions was from a shareholder unhappy with the change in strategy to acquistions of Cardium plays. Management response is that Bakken and Cardium are pretty similar, with Cardium actually having more oil potential per well but higher royalties. Management claims 100% payout on a well in the Bakken of one year or less. Initial production from these wells is about 200 barrels per day and something around 200,000 barrels of oil of reserves per well.

Management very comfortable with year over year growth forecast of 10%.

Should note that the company recently started a share repurchase plan.

ATPG - Judge Denies Obama stay on ruling

And the circus continues. CNBC just announced that the judge has denied Obama's request for a stay on his ruling against the drilling moratorium.

At this point the next step seems to be that Salazar will now try a revised moratorium that is narrower in focus, and based on his comments yesterday, may exclude development wells and instead be focused on exploratory wells where the pressures are not known.

This of course would be good for ATP as their model is development, not exploration.

Petrobakken - CEO interview Jan 2010

Petrobakken CEO in January of this year. A few comments:

- Believe they can affer steady growth of 10% to 15% per year
- Acquisitions they are making are land deals, can't evaluate them on a flowing barrel basis as the reserves they are after aren't producing yet
- Have drilled more horizontal oil wells in Canada than anyone else
- Light oil they produce receives premium to WTI
- Longest producing cardium oil well has only been producing 9 months. Estimates are that these cardium wells have 200k barrels or reserves

My concern at this point is the lack of production history from both the Bakken and the Cardium. What are the decline rates actually going to look like ?

Wednesday, June 23, 2010

Petrobakken - Quick Look

All right here we go. Let us start a value investing journey.

First up is Petrobakken. Quick look to see if it is worth making an effort on.

1) Stock price down from almost $35 when it came public to $23 today.

2) Dividend .96 per year on a $23 stock price = 4% plus dividend yield

3) Resources are in two main areas. Bakken and Cardium.

4) Per CEO interview that I saw on BNN on Jan 29, they expect production growth of 10% to 15% per year

5) Have at least a 10 year drilling inventory

6) All analyst price targets that I see are $35 plus vs $23 share price

Initial high level conclusion. This looks very interesting obviously. 4% dividend yield plus a long seemingly fairly predictable ramp up of production from the cash flow that is invested in drilling.

Next up, I'll do some valuation work, look at the balance sheet and see what risks are here that might not be obvious from an original run through.