October 17, 2011 - 11:59am EST by
2011 2012
Price: 8.03 EPS $0.00 $0.00
Shares Out. (in M): 106 P/E 0.0x 0.0x
Market Cap (in $M): 855 P/FCF 0.0x 0.0x
Net Debt (in $M): 45 EBIT 0 0
TEV ($): 900 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.


This is a very simply idea.Buy one share of Petrobank Energy and Resources Ltd (PBG) and sell one share of PetroBakken Energy Ltd (PBN). As it is today, the spread is trading -16 cents. The recent low is -53 cents and high was 4.5 CAD. I do not expect the spread to be closed soon, due to the lack of short term catalyst. But the spread is trading close the recent lows and the trade provide you opportunity to own some valuable asset for credit. You can be patient and wait for a better entry point. Petrobank Energy and Resources Ltd (PBG) owns 59% or 110.4M shares of the PetroBakken Energy Ltd (PBN). Both are traded on Canadian Stock Exchange and have decent liquidity.  For every share of PBG, besides the slightly more than 1 share of the PBG, it also owns heavy oil assets ( HBU, which includes Kerrobert Project, Dawson Project and May River Project) with more than 650MMbbls Recovable reserves and Archon Technologies, which owns THAI® in-situ combustion technology. The exploration assets at HBU operations are carry at 1.34  Billion CAD book value on its balance sheet or 12 CAD per share.As PBG currently trades below PBN, the pair trade will allow you to own these assets for credit.
Petrobank and PetroBakken manage their capital structure independently and generate their own cash flows, and have the ability to issue secured and unsecured det to fund their own operations. So PBG does not have exposure to PBN's liability except for the equity investment. PetroBank extracts hefty dividend payment from PetroBakken, which it uses to fund its exploration operations at HBU. At current rate, Petrobank collects about 105M CAD annually from PetroBakken. At corporate level, Petrobank has 21M working capital deficit and 45.5M bank borrowing against 2.4 billion asset. The HBU operations are in the exploration and evaluation phase and currently do not generate any operation cash flow. The cap ex per quarter at HBU is about 55M (35M for drilling, 15M for facility construction, and 5M other spending).

The wholly owned  Archon Technologies owns 8 registered patents. The most valuable one is THAI® technology (Toe to Heel Air Injection). It is an evolutionary new configuration for in-situ combustion which combines a horizontal production well with a vertical air injection well placed at the toe. The company claims that THAI has the potential to recover 70-80 percent of bitumen-in-place versus 20-50 percent from current in-situ technologies, could also be applied to previously steamed reservoirs to recover bitumen left behind by CSS and SAGD, and has the potential to operate in reservoirs where other steam-based recovery methods can not.

Why the stocks got so cheap:
1, Petrobakken had some operational issues this year due to bad weather conditions. Its production was down 10% in the first half of the year.
2, The company suspended air injection at the Conklin demonstration project. They encountered evidence of combustion gas possibly migrating up into the nerghboring  formation. Conklin project is the field test for THAI technology. Although Conklin project has the weakest structure for THAI application,  the failure lead the market to significantly mark down the value of THAI.
3, Due to the weak production at Petrobakken, it is speculated that it won't be able to sustain the dividend payout. Therefore Petrobank might be forced to seek more expensive capital to fund its exploration.

However we assign zero value to the Archon Technologies. Even THAI turned out to be a failure it should not significantly damage the value of the trade.  The trade is to seek to long the HBU assets for credit, as long as the exploration investment does not generate negative value that exceed the value of their reserve (it is rarely the case when there is 650MM proven reserve on the book), HBU should always has a positive value. Also the HBU operation is under levered compared to other exploration companies (45M debt vs 1.35B book value), the financing will not be too high for PetroBank to continue operation. PetroBank has all the incentive to extract as much cash as possible from PetroBakken. As its only exposure to PetroBakken is the equity investment, if PetroBakken goes bankrupt for any reason, we will just own a Junior oil/nature gas company with 650MM proven reserves for credit.


There is no short term catalyst. The beginng of production of the heavy oil operations or any position field test of THAI technology should be position for the spread.
    show   sort by    
      Back to top