The basic premise is that Petrobank which has 4 business units trades at a share price that only recognizes the value of the shares Petrobank owns in its two publicly traded subsidiaries Petrominerales and Petrobakken. In other words you pay for two business units (and pay a very attractive price for them) and get the other two units for free (the other two units being Archeon Technologies and Whitesands Heavy Oil).
Last night Petrobank announced a move intended to force the stock market to start considering the value of all four business units. Petrobank’s entire ownership of Petrominerales will be spun out to Petrobank shareholders on December 31, 2010.
I think this is very positive both because it may result in a more sensible valuation of the Petrobank parent entity, but also because of what it may signal about the near future of the Whitesands Business Unit. In giving up its ownership of Petrominerales, Petrobank also gives up a significant stream of cash flow from dividends that Petrominerales pays. It is very encouraging that Petrobank thinks that the Heavy Oil Unit is now to a point where it does not need this cash flow from Petrominerales to assist in development.
I was aware that the Petrobank plans included spinning out both Petrominerales and Petrobank at some point, I just didn’t think it would happen so quickly. Below are the key details from the joint Petrobank/Petrominerales press release:Calgary, Alberta – November 2, 2010 – Petrobank Energy and Resources Ltd. (“Petrobank”) (TSX:PBG) and Petrominerales Ltd. (“Petrominerales”) (TSX: PMG), a 66% owned subsidiary of Petrobank, are pleased to announce a corporate reorganization that will see Petrobank shareholdersreceive Petrobank’s proportionate interest in Petrominerales (the “Reorganization”).
This transaction is designed to enhance long-term value for Petrobank and Petromineralesshareholders. The Reorganization is consistent with our long-held corporate goal of enhancing shareholder value by creating strong, independent companies. Benefits of the Reorganizationinclude:
- Petrobank shareholders will receive direct ownership in the shares of New Petrominerales;
- All new and existing Petrominerales shareholders will directly receive future dividends from New Petrominerales;
- Canadian individual shareholders of New Petrominerales will receive dividends eligible fo the Canadian dividend tax credit;
- New Petrominerales’ public float will increase, providing additional liquidity to shareholders;
- New Petrominerales is expected to qualify for inclusion in the S&P/TSX Composite Index following the Reorganization;
- Increased valuation for Petrobank and New Petrominerales may result from the reduction or elimination of any holding company and parent company share price trading discounts; and
- The expected date of the Reorganization of December 31, 2010 may allow U.S. Petrobank shareholders to benefit from a lower tax rate on the transaction as the receipt of the New Petrominerales shares are expected to be treated as “qualified dividends”, eligible for lower tax rates in 2010 compared to the ordinary income tax rates that are expected in 2011.
Following the Reorganization, Petrobank will continue to own all existing assets, other than Petrominerales, including the heavy oil and bitumen assets, Archon Technologies Ltd. including the THAI™ and other related technologies, and ownership of 109.8 million shares of PetroBakken Energy Ltd. (“PetroBakken”) (TSX: PBN). Petrobank is well positioned to finance our heavy oil and oil sands projects and monetize our THAITM and other related technologies. We expect to continue to receive approximately $105 million of dividends annually from PetroBakken. In addition, we are in discussions with our lead bank to increase our credit facility and extend it to a three year term. With the ongoing Kerrobert expansion, and progress on regulatory approvals at our Dawson and May River developments, Petrobank’s heavy oil business unit expects to become fully commercial in the near future.
Perhaps the most interesting sentence in the release is this: “Petrobank is well positioned to finance our heavy oil and oil sands projects and monetize our THAITM and other related technologies.” Any sort of transaction confirming the value of THAI would be hugely positive for the Petrobank stock price as there is certainly no value factored into the stock price currently for THAI which could turn out to be more valuable than the other 3 business units combined.