Investing Over The Cliff: To PetroBakken Or Not To PetroBakken

Nathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The investors with exposure to the Canadian resource sector experienced some hard times during 2012. The TSX/S&P Venture index has fallen from 1,700 to 1,190, and this has brought several companies down to fire-sale prices. As I am always willing to go bargain hunting, my radar caught PetroBakken Energy (TSX: PBN), which has dropped from $17 in early 2012 down to $9.40 today. 

The PetroBakken Case

PetroBakken Energy is an unconventional oil producer of 53,200 boepd (85% oil and liquids) whose current Enterprise Value (EV) stands at $3.4 billion. This gives $64,000 per flowing barrel, which is a very low ratio for such an oily production. 

Based on the latest Reserves report (Dec 2011), the company also holds 203.5 MMboe 2P Reserves and trades for $16.7/boe, which is another low ratio for reserves that are geared 85% towards oil and liquids.

With estimated annualized funds from operations (FFO) at $650 million, it also trades at 5.2x its FFO, which just adds up to the low valuation metrics. Not to forget that the company pays a hefty dividend of C$0.96 annually, which is a 10% annual yield based on today's closing price at C$10.

Crescent Point Energy (TSX: CPG) is very comparable to PetroBakken, as this is another unconventional Canadian oil producer who operates in the same area, producing 109,000 boepd (90% oil and liquids). Crescent Point trades for $142,000/boepd (90% oil and liquids) and 9.5x the annualized FFO based on its current EV of $15.5 billion. 

The Oil Differential Pain

What has been hurting Petrobakken is the oil differentials between the WTI price and the Edmonton price. The company has discussed this problem both in Q3 2012 and Q2 2012 reports, as it impacts its funds from operations and eventually its capital spending, along with its future production growth. Petrobakken's average third quarter 2012 differential to WTI was approximately 12%, compared to 1% last year.

However, Enbridge (NYSE: ENB) and Enbridge Energy Partners (NYSE: EEP) will definitely alleviate PetroBakken's problem effective 2014, helping this spread to narrow significantly. Enbridge participates in the Seaway pipeline expansion from 150,000 bopd to 400,000 bopd that will be completed in Januar 2013, and there is a twin line planned for 2014 that will further boost capacity to 850,000 bopd, increasing the flow from Cushing, OK to Gulf Coast refineries. The first results from this project are very obvious. The WTI and Brent crude spread shrank the most in more than three months. The price spread narrowed by 6.4% in the past week, pulling the Edmonton price higher as well. 

Both Enbridge and Enbridge Energy Partners will also fund the Light Oil Access Program, which is a $6.2 billion project that aims to ease congestion in the US Midwest refining hub and move oil from Canada to the US refineries, adding 400,000 bopd to the current network, effective 2014. 
 
On top of that, Enbridge recently announced a $600 million expansion of its current Canadian oil pipeline system that will be in service in 2015 and involves increased pumping horsepower, with no line pipe construction. Enbridge will fund this project with $400 million, and Enbridge Energy Partners will add the remaining $200 million. 

Share Buyback And Growth 
 
PetroBakken has remained active with its Normal Course Issuer Bid, purchasing 493,000 shares in the Q3 2012 at a total cost of $6.4 million ($13.09/share). During the first 10 months of 2012, the company has purchased approximately 3.8 million shares at a total cost of $51.7 million ($13.51/share).

This is another bullish sign that weighs on the positive side of the equation. Actually, I have not found any substantial negatives in the subject company. According to the latest corporate update, PetroBakken will not grow by a whopping 40% in 2013 versus 2012, but this is not a problem for me. Based on the corporate $675 million capital plan in 2013, PetroBakken is expected to grow its average annual production by 8%-10%.

Foolish Conclusion

It seems that good times have bypassed this stock, which has underperformed in 2012 despite its production growth from 46,700 boepd in early 2012 to 53,200 boepd in late 2012. I don't know exactly what PetroBakken is worth, but I believe that it is worth considerably more than what the current share price suggests.

 


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