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Response To The Critique of My Petrobank Analysis

October 23, 2010 | About:
CanadianValue

CanadianValue

210 followers
A nice gentleman named Mr. Graham that I don’t know was kind enough to write a very critical article of my analysis of Petrobank. He dedicated his analysis to David Einhorn seemingly suggesting he had managed some sort of legendary work of value investing. I had written a rather glowing article on the company and apparently my new friend did not think much of it.

I thought I’d give his analysis a review to see if I could learn anything. He certainly wrote in a tone that implied he could give me a few lessons. And any other analyst for that matter.

So I’ll go through his article point for point:

Petrobakken Valuation

His valuation of Petrobakken. This is one of the publicly traded subsidiaries of Petrobank.

His calculation of Petrobakken value was done using the proved and probable reserves PV10 figure of $3.65 billion. He then took the PV10 figure divided it by the number of shares outstanding to arrive at a figure of $14.21 per share.

As the share price is just under $23 today he concluded that the shares are considerably overvalued.

To that he added the following “I know some will point out that they have some other assets, such as land which is not included in this analysis, but those assets are usually insignificant and don’t provide any cash from operations. “

Just to recap. His valuation of Petrobakken consists of taking the PV10 value of the reserves that have been booked and then just assuming that all of the other assets that aren’t included in the PV10 figure don’t have any value because they are “Usually insignificant”. I’d say that his analysis of Petrobakken likely took about 10 minutes in total.

And I have to say….are you kidding me ? This guy is making me out to be some sort of a hack and his analysis involves not bothering to look at any other assets that aren’t in the PV10 figure because they are “usually insignicant”. Some serious value investing there Mr. Graham, why be bothered with looking, just assume instead.

Since Mr. Graham can’t be bothered to look at these “other assets” of Petrobakken let me save him some time. Because unlike Mr. Graham I actually do bother to research companies before I write articles. Here is what was missed.

1) Mr. Graham missed two thirds of their Bakken assets. The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date. Petrobakken has 1,050 drilling locations in the Bakken. The 2P number that you used is based on 348 wells drilled. That is 33% of their Bakken assets. The Bakken of course is a well known play, and these drilling locations are in the known to be in productive Bakken acreage. These are ultra low risk drilling locations. By ignoring them Mr. Graham is ignoring 67% of the value of Petrobakken’s Bakken properties.

Now maybe Mr. Graham is the only person who doesn’t think these other 700 or so drilling locations have any value. And if he does think that I can assure you he is the only one given the prices paid for undeveloped Bakken land over the past few years.

2) What about their Cardium assets ? Mr. Graham assigns zero value to the 120,000 undeveloped acres that Petrobakken holds in the Cardium. In fact he doesn’t even mention them. Don’t tell anyone, but I suspect it might be because he didn’t spend enough time researching to even know that these assets exist.

Let me get Mr. Graham up to speed. Petrobakken this year aggressively acquired land in the middle of what is turning into a highly productive Alberta Cardium play (listen to the recent PWE investor day) In fact Petrobakken is now the 3rd largest holder of Cardium acreage. In total they have 120,000 net acres and over 500 drilling locations. Petrobakken has zero dollars of reserves booked on these properties (because they are just starting drilling) so Mr. Graham has not given Petrobakken a dime of credit for these properties in his analysis.

3) Mr. Graham has also ignored two other significant plays that Petrobakken has. 350 conventional drilling locations in SouthEast Saskatchewan and another 400 in the Horn River play in British Columbia. By only looking at the PV10 of 2P reserves these assets have not been accounted for.

At this point I’m tempted to stop. Mr. Graham has missed the majority of Petrobakken’s asset value in his brief analysis. His analysis does not appear to have been performed by someone familiar with this industries and certainly no familiarity with companies such as Petrobakken or other Bakken holders like Crescent Point.

The value these companies created for shareholders was achieved when they got into the Bakken early, inexpensively and in a major way. Petrobakken appears to have added to this by doing the same in the Cardium. They have years and years of known drilling locations in these undeveloped acres. There is value in that there land boy, value.

Mr. Graham, those “other assets” that you can’t be bothered to analyze is where us value investors (and honestly anyone who follows the industry or reads the newspapers in Saskatchewan) knows hundreds of millions of dollars of asset lie.

Petrominerales Valuation

Good grief. This valuation effort is worse. Again Mr. Graham takes only the PV10 of the 2P reserves into his valuation work. He clearly has not done more than a cursory look into Petrominerales.

Here are the key points about Petrominerales

1) Petrominerales is an exploration company

2) The company has had four consecutive years of production growth

3) The company has 2.1 million acres of exploration potential in Columbia

4) The company has 5.2 million acres of exploration potential in Peru

5) The company has identified 75 high potential locations

Petrominerales is a very difficult company to value I will admit that. Four years ago the company had a PV10 of basically zero. As they have drilled out their high potential and enormous acreage they already have established a PV10 of $2bil. How well would have valuing this company solely on a PV10 basis 4 years ago have worked out ? Terribly of course, because the value is again in the huge landholdings of highly prospective property.

Again. Most of the value in Petrominerales is in those “other assets” that Mr. Graham can’t be bothered to look at because they “usually aren’t worth anything”.

I don’t know about you but I bet 7 million acres are worth something. And given that this company has grown production by 100% per year for four years running I have to think they have a pretty good idea where they should be drilling.

Below is a link to an analyst report on Petrominerales. The analyst in question is Alan Knowles of Haywood Securities. Mr. Graham scoffs at all analysts as being utterly useless. Mr. Knowles has a $42 price target on PMG vs $25 today and Mr. Graham’s valuation of $17. I’ve followed Mr. Knowles for a long time and think he is exceptionally good at what he does. Compare his report that values this company at $42 with the two sentences of work Mr. Graham put in.

Consider that Knowles has actually been to Columbia and Peru to understand the value of these assets. Consider that Knowles follows every transaction that happens in the areas where PBG/PMG/PBN work. Compare that to Mr. Graham who spent an hour looking up PV10 numbers. Who do you really think has valued this company more accurately ?

Here is Mr. Knowles report:

http://supplytracking.com/PetroMinerales.pdf

Heavy Oil Assets

Here is Mr. Graham’s detailed analysis

“3) Heavy oil assets. Here, they don’t have any proven producing reserves in the report, but simply NPV10-BT of $367 million for 2P reserves. I believe some of these are coming online as of this year. These assets are held at the parent company level and PBG has no debt. The fully diluted shares outstanding is 110.2 million.

The Net Asset Value can be computed to be:

NAV10 2P = ($367 million + 0) / 110.2 million = $3.33/share (These are wholly owned by PBG) “

That is it. 690 million barrels of oil (and that is at May River alone and excludes Kerrobert and . Mr. Graham figures the value is $367 million. Petrobank provides a PV10 estimate of these assets in their presentation of about $3.3 billion.

But since they don’t have a specific development plan filed and thus no P2 reserves, Mr. Graham figures they are basically worthless. Again I think most value investors would not blindly follow specific PV10 figure, but apply common sense to determine that 690 million barrels of oil have value.

Whitesands alone is expected to produce 100,000 barrels a day for 30 years once developed. You can’t see that in any financial statements. You have to spend more than 5 minutes to fully understand the value of a company’s assets.

THAI Technology

Here is Mr. Graham on THAI. Since he seemingly heard of the company this week through my article I’m amazed he can get his head around this complicated technology so quickly.

“4) THAI technology. This is interesting because Baytex and Shell Canada just sold their respective shares in the project to Petrobank. Since they are partners they know exactly how well the THAI process is performing. Why did they just sell? I would guess the results aren’t coming on as expected and both partners wanted out. It was interesting that Baytex didn’t even discuss in there last report. Ascribing a value is very difficult so I will give it a value of zero. “

This might be the most absurd part of Mr. Graham’s condescending criticism of my report. He says that because Shell and Baytex who are Petrobank’s partners on THAI are selling these assets back to Petrobank, that THAI must not have any value.

Mr. Graham.

1) Neither Shell or Baytex have ANY interest in THAI. None. They were both partners in the production from the two properties that THAI is being tested on. So they would share in future production from these properties, they don’t share in the value of THAI. It is Petrobank that retains full 100% interest in THAI to roll out to other users.

2) Neither Shell or Baytex were the original partners on these properties. They acquired them when they acquired the original partners in other transactions. For Shell in particular the production that will come from Dawson is of no significance to them. They just got rid of something they never had any interest in.

3) Baytex is still a partner on the Kerrobert production. They are now a partner in the form of an override on production instead of a partner who has to come up with the up front capital to develop the property.

These transactions tell you nothing about THAI. The other parties only interest was in their share of production, and remember the property that Shell gave up can also be developed (less efficiently) using other technologies so they aren’t interested in it period. It is the property that the transactions involved not THAI.

Mr. Graham’s Summary

“Myself, as a value investor, I prefer to buy with a margin of safety. This investment clearly doesn’t offer and room for error on the reserves or the price of the commodities. Clearly a lot of arm waving is required to believe that these shares provide a margin of safety. Analyst reports are not worth the value of the paper they are printed on. Commit them to the fire. “

These seem like the words of a young overconfident investor. Have a look at the very simplistic analysis that Mr. Graham did on Petrobank which:

1) Ignores 75% or more of Petrobakken’s asset value by not considering undeveloped acreage

2) Ignores all of Petrominerales’ multi-million acre portfolio of highly prospective properties

3) Assigns no value to almost 700 million BOE of heavy oil assets because reserves have yet to be booked

4) Gets the facts of a recent material transaction completely wrong (suggesting Shell and Baytex had some sort of interest in THAI)

…and then compare it to the analysis of someone like Alan Knowles who has studied this company for years, has visited their properties in South America, Saskatchewan and Alberta and is familiar with every other company in Canada in this industry.

Mr. Knowles has a target of $75 for Petrobank. Mr. Graham who has spent a couple of hours on the company thinks it is worth less than $40.

I know which analysis of the two I would commit to fire. And it wouldn’t be the one from the guy with industry wide reputation as a top notch analyst.

But don’t take my word for it. Google Alan Knowles and read his research and see what you think. It is better than anything I can do.

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 4.6/5 (14 votes)

Comments

Kevin Graham
Kevin Graham - 3 years ago


Come on Devin you can't be serious?

Since you removed this reponse on your blog, I put it on my blog and here for all to read.

First there is so much bunk in this article the readers can try to determine truth from fantasy. You seem to know a lot about me and how I analyzed this company. Again more speculation.

Let me respond to your summary of points I am missing in my valuation.

1) Ignoring undeveloped acreage. Please inform me of the value, or should I say please speculate on the value.

2) Petrominerales’ portfolio of highly prospective properties. Again please inform me of the value, or as you said "prospective" properties.

3) Heavy oil assets yet to be booked as reserves. Again, please inform me of the (specutive) value...

4) Shell and Baytex. Here you are half correct, they are partners but PBG owns the THAI technology. That is not what I said. I said Shell and Baytex knows how well the joint wells are performing and decided to sell. Why did they sell, I offered my opinion lets have yours.

As a value investor, you seem to be doing a fair bit of speculating on 1, 2, & 3 above. If you want to call that value investing go ahead, but you need a new definition.


Regards,

Kevin


Please note: I did not attack your analysis in my post but simply presented the facts. Stop the childish attacks of my character and stick to the facts.


CanadianValue
CanadianValue - 3 years ago
Kevin,

Which specific part of my response is bunk ? Which part is fantasy ?

Please read through the response that you just wrote above. I gave you a specific list of things that I think you missed from your valuation.

Your response doesn't tell me why I'm wrong in assigning value to these things. Your response simply lists back my points and says "so what" ?

I thought I laid out fairly well where your analysis was lacking.

For example, Petrobakken has reserves booked from only 342 of their 1,050 drilling locations in the Bakken. In other words your valuation only recognizes the 1/3 of their Bakken asset value. This acreage is right in the heart of the Bakken play, it isn't an "I sure hope there is oil there situation". These locations have oil, the reserves simply aren't booked until the wells are drilled.

There are two players that locked down all of this acreage early and inexpensively. Petrobakken and Crescent Point. Both have at least a decade of drilling to do on these properties. This future drilling is what you don't recognize as being worth anything.

I don't know how you can ignore hundreds of thousands of acres of prime Bakken acreage in your valuation and think you are doing a good job. And you can say the same for the Cardium. Petrobakken spent hundreds of millions of dollars locking up this acreage this year. You have valued it at zero.

How can we have a healthy debate if you don't even have the experience to understand that owning hundreds of thousands of acres in the prime Bakken and Cardium formations means that you have raw land worth hundreds of millions of dollars ?

And you Petrominerales analysis is just unbelievable. You use the 09 reserve numbers. Were you aware of the oil discoveries that PMG has made so far in 2010 which aren't in the reserve figures ? Or course you aren't. You might want to though. Here is a little color for you:

In January PMG cased Candelilla 2 as an oil well, and in March they cased Candelilla 3 as an oil well. Together they have added 25,000 barrels of oil per day to production. That is more than the entire company in 2009. Neither of them is in the reserve figures you have used, because you have done the research to even be aware of them.

PMG has 7 million more acres in Columbia and Peru. They have a 90% success rate in drilling exploration wells so far. That will go down, but to ignore all of that AND completely ignore the reserves attached to Candelilla is just ridiculous.

Kevin. You don't know this company. You have spent 6 hours on it. You value the Cardium and Bakken acreage is worthless. You aren't even aware of the largest part of Petrominerales reserves.

Yes I find it frustrating that you critique my work as though you are the second coming of David Einhorn, when your work makes clear that you have very little experience looking at oil companies.

_
Kevin Graham
Kevin Graham - 3 years ago
"A nice gentleman named Mr. Graham that I don’t know was kind enough to write a very critical article of my analysis of Petrobank."

No where was I “very critical” of your analysis. All I said was that you presented an interesting, “heads I win huge, tails I win big.” That is a huge statement and better have substance behind it.

Since Mr. Graham can’t be bothered to look at these “other assets” of Petrobakken let me save him some time. Because unlike Mr. Graham I actually do bother to research companies before I write articles. Here is what was missed.

1) Mr. Graham missed two thirds of their Bakken assets. The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date. Petrobakken has 1,050 drilling locations in the Bakken. The 2P number that you used is based on 348 wells drilled. That is 33% of their Bakken assets. The Bakken of course is a well known play, and these drilling locations are in the known to be in productive Bakken acreage. These are ultra low risk drilling locations. By ignoring them Mr. Graham is ignoring 67% of the value of Petrobakken’s Bakken properties.



This is not true. The 2P number does include drilling locations to be drilled over the next few years. In fact, the 1P number may also contain Proved Undeveloped reserves or PUDs. These are generally wells that are going to be drilled over the next 12 months located next to proven producing wells. I am not missing 2/3rd of their Bakken assets. Please read the reserve report before you demonstrate your ignorance.

Let me again quote from the reserve report that Mr. Shire has now demonstrated for us has not read.

"The Sproule Report has assigned proved undeveloped reserves to 207 net light oil well locations in the Bakken properties in southeast Saskatchewan. In addition, the Sproule Report has assigned proved undeveloped reserves to 90 net light oil locations in the Conventional properties located in southeast Saskatchewan and Manitoba."

Now that is approximately 300 wells that will be drilled to the end of 2012 that are already booked as reserves.

Oops… Now is Mr. Shire telling the truth or is he just using deception to promote his book?

Let me get Mr. Graham up to speed. Petrobakken this year aggressively acquired land in the middle of what is turning into a highly productive Alberta Cardium play (listen to the recent PWE investor day) In fact Petrobakken is now the 3rd largest holder of Cardium acreage. In total they have 120,000 net acres and over 500 drilling locations. Petrobakken has zero dollars of reserves booked on these properties (because they are just starting drilling) so Mr. Graham has not given Petrobakken a dime of credit for these properties in his analysis.



Wow, Mr Shire seems to know the value of these wells before they are even drilled. Just because you have land doesn’t prove it is going to be productive, let alone be even close to the most productive area of the formation. This is pure fantasy until the wells are drilled and economics proven.

At this point I’m tempted to stop. Mr. Graham has missed the majority of Petrobakken’s asset value in his brief analysis. His analysis does not appear to have been performed by someone familiar with this industries and certainly no familiarity with companies such as Petrobakken or other Bakken holders like Crescent Point.


No please don’t stop, I haven’t missed the majority of the value in my analysis. I am far more familiar with this industry than you would like.

Mr. Graham, those “other assets” that you can’t be bothered to analyze is where us value investors (and honestly anyone who follows the industry or reads the newspapers in Saskatchewan) knows hundreds of millions of dollars of asset lie.

You be the judge. Who has read the engineering report and who’s been reading newspapers? Mr. Shire doesn't seem to understand which wells are and aren't on the books.

That is it. 690 million barrels of oil (and that is at May River alone and excludes Kerrobert and . Mr. Graham figures the value is $367 million. Petrobank provides a PV10 estimate of these assets in their presentation of about $3.3 billion.

Now this shows a significant problem with how Mr. Shire determines the value of, well, anything. Just go look in the companies overhyped investor presentation and repeat it’s contents.

First, I don’t figure that the value is $367 million. That is the value the engineering report gave to the probable reserves. Call Sproule and discuss your issues with them.

Secondly, this creates another problem with inexperienced investors. Let me explain with an example. Connacher (TSE-CLL) is another oil & gas company that was touting the exact same thing a few years ago. They had this huge value of oil sand assets. The ignorant investors simple took the total value of from the investor presentation and divided the shares outstanding and came up huge value per share. The only problem was coming up with the billion plus dollars to get the project on production. Obviously it was going to take a huge amount of debt or equity to get the project off the ground. Obviously the faithful didn’t want to hear what I had to say, apparently Mr. Shire doesn’t either.

Some many investors fail to realize that heavy oil and oil sands are very capital intensive and return generally haven’t been that good. The only exception was back when oil was $130.

Beyond this Mr. Shire states that I am missing a bunch of speculative assets, such as land and “highly prospective” properties. Ok, maybe I am. As I said before if Mr. Shire wants to call this value investing, go ahead, perhaps he needs a new definition.

I am really over having to explain myself Mr. Shire. I have written enough here to prove who knows what they are talking about and who don’t have a clue. If I ever write a book it will be called “defying economic gravity.” Everyone tries to do it but eventually they come crashing back to reality.


Regards,

Kevin
value_barbarossa
Value_barbarossa - 3 years ago
You say the business is capital intensive and returns haven't been good. You treat it as if this company has tons of speculative assets.

Petrobakken has some of the highest netbacks I've seen at around $50 per BOE.

Graham has his panties all up in a bunch, when the real Benjamin Graham would have bought Petrobank and shorted Petrobakken and Petrominerales (if he thought they were overvalued.)

Even if you think Petrobakken/Petrominerales are overvalued, you can create the stub at petrobank for a very low value which is far below the value of the Whitesands project alone.
CanadianValue
CanadianValue - 3 years ago


"Now that is approximately 300 wells that will be drilled to the end of 2012 that are already booked as reserves.

Oops… Now is Mr. Shire telling the truth or is he just using deception to promote his book?"



Come on Kevin. Just call it a day.

You are exactly right. The reserve reports cover 348 drilling locations that takes them through 2012. That is 348 out of the 1,050 drilling locations that they have in the Bakken. Just as I said.

Check the most recent company presentation on page 11.

And for you to suggest that these Cardium assets are of questionable value shows that you haven't been following the drilling results that have been coming in from this play in the last 6 months.

This is a pointless debate as you seem very new to analyzing an oil and gas company.

If you think hundreds of thousands of acres in prime Bakken and Cardium areas aren't worth what everyone else in the world thinks that is fine.

At least you are doing some digging on the company now. That will benefit you down the road.
Kevin Graham
Kevin Graham - 3 years ago
Devin,

I agree this is getting out of hand. This will be my last post on the topic.

Please reread my last post. You stated that the 2P reserves are for the 348 well already drilled by PBG. You said the reserve report ignores any future 1000+ wells. That is not true. I just quoted from the Sproule report that said they have book all of their drilling till the end of 2012, approx 300 wells in addition to the 348 wells aready drilled. These wells are not drilled yet. Do you understand the difference?

Hopefully you will read the company's reports in the future and not assign $50/share value to hundreds of thousands of acres in prime Bakken and Cardium in the future. Perhaps be a little more balanced in the future. I deliberately presented the bear case to temper your excitement.

I am still waiting for your breakdown of your $80 per share value. I have given you the first $30, is the rest assigned to Land?

PBN's Bakken lands had a recycle ratio of 0.9 last year... Yawn. Do you know what that means? They paid $46.03 to find a BOE and the got paid a netback of $43.04 when they took it out of the ground. Great business... do it long enough and you will be bankrupt.

Now to the guy who said PBN's netbacks are $50/BOE, if it cost them more than their netback it doesn't matter what the netback is.

PMG's recycle ratio was 2 last year. Not bad, at least it's profitably developing reserves. Not the best in the industry.

Lastly, PBG had net income of $145 million last year. Total options costs came to $30.1 million or 20% of net income.

As for being new to oil and gas, keep telling yourself that.

Regards,

Kevin

CanadianValue
CanadianValue - 3 years ago


I don't think it really matters what I say, you are just going to scurry back and try and come up with something else.

Your "Petrobank is a terrible risk/reward scenario" missed all of the following. This is your incredible analysis that you felt deserved to be dedicated to David Einhorn.

1) Because you looked only at one number (PV10) you gave roughly 2/3rds of Petrobakken's land base exactly zero value. 2P reserves are booked on 348 out of 1,050 drilling locations. See page 11 in the link below:

http://www.petrobakken.com/wp-content/uploads/2009/06/PBN-2010-09-27-Corporate-Update-VIEW.pdf

The Bakken is a resource play. There essentially no geological risk. If you have the land and it is within the known boundries of the Bakken, you know what is there. That is why you see companies paying crazy prices per acre to lock it up. Luckily for PBN shareholders this company established a dominant position early.

Petrobakken has a decade of 15% per year production growth ahead of it, but the way you value it assumes it will never grow again. It is like saying an investor should pay the same multiple for a technology company growing 15% a year as they do for a company that hasn't grown for years.

2) Because you looked only only at the PV10 figure you missed entirely the hundreds of thousands of acres the company holds in the Cardium. And when I bring them to your attention you suggest that valuing them is speculation. I don't know what to say to you. If you aren't aware of what is going on in the Cardium and that this land is worth hundreds of millions as raw land then how can I help you ?

3) In your valuation of Petrominerales you missed including 50% of their production and reserves because you weren't aware of discoveries since the last reserve report. You make yourself out to be David Einhorn but you aren't even aware of half of the value of the company ? When I bring this to your attention you just pass it off suggesting the stock price already prices this in ! Hardly material. And of course you make no attempt to value the 75 high impact exploration targets that is in the companies pipeline. And this despite the fact the company is hitting on 90% so far. Now I don't think that kind of success or anything close to it will continue. But make no mistake this company that has grown 100% per year for 4 years has a lot of growth ahead of it. But you value it using only 50% of its EXISTING RESERVES.

My point in my article is that the value of these two subsidiaries is basically all that you pay for in the current share price of the parent. The 690 million BOE in the heavy oil unit AND THAI you get completely for free.

Maybe you can't see it, but I think you did a lousy job of valuing PBN and PMG for the reasons above. I mean come on, you miss all of the locked down acreage in resource plays that the Petrobakken has AND you miss half of PMG's reserves/production.

You missed almost everything, yet you are still here making me out to be an idiot and suggesting that all analyst work should be set on fire. Your overconfidence is remarkable and you lack of experience looking at a company like this very evident, despite your aggressive assertions otherwise.

Kevin Graham
Kevin Graham - 3 years ago
You just won’t quit will you?

Now your comments further expose your ignorance. Did you or did you not read the reserve report before you wrote your masterpiece on PBG?

Now, let’s go back to the reserve report again. PBN has book ~300 PUDs in the Bakken/Mississippian formations. Those are proven undeveloped wells that have not been drilled as of the report. As for probable reserves they have booked another 180 wells in the Bakken/Mississippian formations (135 Bakken, 45 other Mississippian).

Let me quote the reserves report again for you so you can read it.

“The Sproule Report has assigned proved undeveloped reserves to 207 net light oil well locations in the Bakken properties in southeast Saskatchewan. In addition, the Sproule Report has assigned proved undeveloped reserves to 90 net light oil locations in the Conventional properties located in southeast Saskatchewan and Manitoba”

“The Sproule Report has assigned probable undeveloped reserves to 135 net locations in the Bakken properties in southeast Saskatchewan. In addition, the Sproule Report has assigned probable undeveloped reserves to 45 net light oil locations in the Conventional properties located in southeast Saskatchewan and Manitoba.”
Now, I will do the math since you seem to be fairly poor at reading. The total is 477 wells already booked that will take them out to the end of 2012. The probable locations are step out and carry greater uncertainty. Again, all of this is all in the reserve report. I shouldn’t have to explain this to you. You seem to think the Bakken is something else based on what you heard in the news. Why do you continue to think that they haven’t booked any of their 1000+ wells?

Now you can continue to think that I am some sort of amateur, go ahead. You can believe that along with your $80 price target on PBG. Arguing from ignorance is a sure fire way to lose any debate.



Regards,

Kevin

http://canadianvalueinvesting.blogspot.com

CanadianValue
CanadianValue - 3 years ago


"Why do you continue to think that they haven’t booked any of their 1000+ wells?"

I didn't say they hadn't booked any. I said they had booked 384 locations out of 1,050 in the Bakken alone. Refer to my comment one above yours the number is directly from Petrobakken presentation in August so it if very current. I suspect you would have a different figure because of non-core dispositions in Q1.

Please take a step back and think before you start typing your next rebuttal. I have a few points for consideration. I'm going to try and be polite. I'm not always good at it.

1) You are focusing on whether is is 477 or 384.

2) Isn't the more important number the 1,050 that their Bakken acreage covers ? Either way you have missed valuing the majority of their Bakken assets. The truth about the Bakken and about the Cardium is that there isn't geological risk. There is not much doubt that the rest of the drilling locations where there are no reserves booked are worth an amount similar to the current booked reserves. So if the PV10 on 384 (that is the number Petrobakken quotes) is $3bil or whatever the other 500 or 700 locations are likely also going to be worth something similar. If you want to argue that there isn't much I can do to help you. You need to be familiar with the resource play.

3) Aren't the 500 Cardium locations more important in valuing this company than whether the reserve report is 477 or 384 ? These wells are performing as well or better than Bakken wells based on results I've read about. So you are again looking at an asset worth more than a billion dollars.

4) Have you considered the Horn River assets at all ? Another 400 locations.

5) How about looking at PBN from a cash flow perspective ? They are currently able fund a 4% dividend, while they grow production 10% to 15% per year for at least the next 10 years AND they are buying back shares. I don't know many other oil companies able to return cash like that to shareholders.

6) And what about the Candelilla reserves that you missed. That is a huge error on the valuation of that company. Including those reserves increases the valuation using your methodology (which I don't agree with because is completely ignores any upside in 7 million acres of a highly prospective region) means you have to adjust your valuation upwards by at least 100%.

I hope that was a more polite approach. I think your valuation of this company is way off and I think that is fairly obvious to most readers. Stop trying to focus on whether the reserve report says 477 wells or 384 wells and apply common sense.

Valuation work is never going to be exact. But common sense should tell you that the unbooked 700 or 600 drilling locations in the exact same play in Bakken are going to have signficant value, as is the Cardium play, as is the huge land base in Columbia and Peru, as is 690 million barrels of heavy oil and oil sands.

I can tell that the prices I'm paying for PMG and PBN are at the worst fair and very likely a nice discounts. On top of that I don't pay anything for 690 million BOE of the HBU and a get a free lottery ticket on THAI which McDaniels (also an engineer like Sproules) says works and which is going into expansion drilling right now.

Maybe other readers can let me know if they think I'm on the right track with my thinking ? I'm not trying to pull the wool over anyones eyes. I actually thought it is very difficult not to see the value of the subsidiaries given the huge asset bases and Petrobank's price vs current and growing cash flow.
Kevin Graham
Kevin Graham - 3 years ago
I quote again:

1) Mr. Graham missed two thirds of their Bakken assets. The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date. Petrobakken has 1,050 drilling locations in the Bakken. The 2P number that you used is based on 348 wells drilled. That is 33% of their Bakken assets. The Bakken of course is a well known play, and these drilling locations are in the known to be in productive Bakken acreage. These are ultra low risk drilling locations. By ignoring them Mr. Graham is ignoring 67% of the value of Petrobakken’s Bakken properties.

I am going to explain this as clearly as I know possible. I will break it down.

The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date.

And

The 2P number that you used is based on 348 wells drilled.
This is FALSE. THIS IS NOT TRUE.


The 2P number I quoted includes all 384 wells you said have been drilled (I will take your word for this). Beyond, that they have booked 297 PUDs. These wells have not been drilled. This will be drilled in 2010, 2011 and 2012. Beyond that they have booked 180 probable wells. These wells have not been drilled. This will be drilled in 2010, 2011, and 2012, but more likely in the later timeframe.

Summary

348 wells already drilled + 297 PUDs (not drilled)+ 180 probables (not drilled) = 825 wells.

Please read the report and confirm this for yourself. Don't take my word for it.

I appreciate your new tone and I will try to be more civil as well. Next statement (from your last comment).

I think your valuation of this company is way off and I think that is fairly obvious to most readers. Stop trying to focus on whether the reserve report says 477 wells or 384 wells and apply common sense.You thought my valuation was incorrect because you weren't aware that 477 undrilled wells have already been booked. Secondly, why should I stop using reason and apply common sense. I am trying to breakdown what the value is and isn't. Since the 2P reserves does include 477 undrilled wells then my analysis is the best we both have to go on. Can't you see that. You seem to imply that common sense is some sort of sixth sense where we percieve the value. Economics are economics.

I can tell that the prices I'm paying for PMG and PBN are at the worst fair and very likely a nice discounts.Thanks for the admission of fair value. I will also go on the record and state that I believe the company is fairly valued. That said, they are trading at fairly significant premiums to the 2P reserve value so the wells they are currently drilling must perform better than what they forecasted.

You also state the Petrominerales has made a significant discover, which is why they are trading where they are. I will take your word on it, I will ready what the reserve report says next year to confirm it as so. So at best PBN & PBG are trading at fair value but are at a 50% premium to reserves value so they better deliver the goods. I just don't have that much faith in the company.

As for the heavy oil and THAI, you need to be very careful with the contingent resources. THAI is unproven and the heavy oil business is tough and in many cases borderline economic. It is very capital intensive compared to conventional wells.

With all that said, this is not a value investment by no means. A lot of expectations are already built into the prices so I don't see the value.

Back in 2001 you could buy oil and gas company's by the handful for 2P reserve value. Some could be had for just proven producing value (just the wells on production). Companies that operated in less politically unstable regions traded at steep discounts because of the additional risk. Someday they will trade at those levels again. Resources and gold have been the hot stocks lately.

Markets overshoot and then undershoot. Everyday the Market votes on the value of these companies but in the long term the Market will weigh the real value in these companies by the cash they produce. They better deliver.

The biggest reason it is hard to value the company is because PBG cannot control oil prices. Nobody knows where oil will be 3 years from now. Now for Walmart, I can reasonable guess what their earnings will be 3-4 years from now because they are very predictable. Degree of difficulty doesn't pay in investing, pick something simple and easier to value. This is what Buffett calls jumping a 1 ft bar, and recognizing what you know vs what you don't know (circle of competence).

As you know, I have already offered one original value idea on my blog. It's trading at 4x normalized earnings, and bleeds free cashflow. Hardwoods is a very simple company that has been selling wood for 70 years. I will bet on a company like that any day of the week than one that is so difficult to predict. Feel free to pick it apart. I would like to know if I am missing something.

I am moving on because I have to read the Kraft annual report. Been meaning to read it for a while.

Good luck with PBG!

Kevin

http://canadianvalueinvesting.blogspot.com
jsarasin
Jsarasin - 3 years ago
--
Kevin Graham
Kevin Graham - 3 years ago
I appreciate your comments. At least, I can recognize what I do know and what I don't. You think oil prices will be higher but have no basis for this belief other than common sense. I have been around the oil market long enough to know how unpredictable it is. I am at least honest enough to say I don't know. Buffett used common sense when he bought COP when oil was $130/boe. He has now recognized his mistake.

As for my comment about markets overshooting and undershooting is a rough quote from Ben Graham. "In the short run the market is a voting machine, but in the long run it is a weighing machine." Buffett has stated this countless times.

Your comment on the market serving you, not guiding you, is precisely what I have been saying on Petrobank as well. We cannot add together the market value of the subs and arrive at some sort of "value". Arbitrage opportunity maybe, but not value. Then in his analysis adds together some estimate of future market prices and comes up with $80 per share. We can do this with any company but it really doesn't mean anything, and definitely doesn't give you a margin of safety.

It doesn't matter what the market says things are worth you must break it down to asset value and value yourself. Perhaps I'm the only one who can see that. Value investing can be lonely.

Regards,

Kevin

canadianvalueinvesting.blogspot.com

batbeer2
Batbeer2 premium member - 3 years ago
Buffett used common sense when he bought COP when oil was $130/boe. He has now recognized his mistake.

I think it is fair to say Buffett's idea of an investment error is somewhat unconventional.

I don't think Buffett's buying (or for that matter selling) of COP had anything to do with his expectations of oil prices for 2010.
jsarasin
Jsarasin - 3 years ago


'It doesn't matter what the market says things are worth you must break it down to asset value and value yourself. Perhaps I'm the only one who can see that. Value investing can be lonely.'

Listen to yourself. Please stop posting on gurufocus for everyone's sake.

Jason
Kevin Graham
Kevin Graham - 3 years ago
Jason,

You have been on gurufocus for 4 hours. Your ignorance of value investing is interesting to say the least. Did Devin put you up to this?

What did the market value Nortel Networks and CMGI at back in 1999? Do you believe in Modern Portfolio Theory and Efficient Markets?

If you think that market prices = value, you might as well say black = white.

Regards,

Kevin

http://canadianvalueinvesting.blogspot.com
jsarasin
Jsarasin - 3 years ago
Or Kevin = good investor.

I invest in companies that are are undervalued. Call me what you will.

softdude2000
Softdude2000 - 3 years ago
Batbeer,

Dont you think Buffett has to put some value for a barrel of oil to evaluate the oil company? This is my biggest problem with oil companies - how to evaluate them without speculating oil price? My answer was to find oil company that has lowest cost than most other companies. But the problem is companies like XOM (which can survive low oil price) are fairly valued. Companies like ATPG has potential for good profit if oil prices stay or go above $80.
batbeer2
Batbeer2 premium member - 3 years ago
Dont you think Buffett has to put some value for a barrel of oil to evaluate the oil company?

Ah, yes..... just not for a single year. Bufett may think of COP as a mistake, I just don't think he based his investment on his estimate of oil prices for the single year 2010 and subsequently considered it a mistake because oil prices didn't do what he expected them to do this year.

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