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Kevin Graham
Kevin Graham
Articles  | Author's Website |

Petrobank Energy (PBEGF) – A Terrible Risk/Reward Scenario

October 23, 2010 | About:

After reading the article below on Petrobank (PBEGF.PK), I decided that I better dig in and take a look at this opportunity. It was presented as, “Heads I win huge, tails I win pretty big.


Naturally I don’t buy on other’s opinions but I will use them as a starting point for my own analysis. I am going to give my detailed analysis of Petrobank (TSE – PBG) right off the start because I don't care for research opinions of analysts. I like to keep my investment ideas simple, but after digging a little deeper I discovered the company is fairly or overvalued and has some very lucritive stock options.

The Subsidiaries Are Trading at a Steep Premium to Intrinsic Value

1) Lets start with Petrobakken (TSE - PBN). First, the PBN's reserves have a net present value, discounted at 10%, before tax value (NPV10-BT) of $2.46 billion for proved reserves (1P) and a NPV10-BT value of $3.65 billion for proved plus probable reserves (2P). I tend to be conservative and use proven reserves but for this analysis it won't matter much so we'll use the more optimistic value of $3.7 billion, which includes reserves that are not yet on production. The company has a convoluted debt structure of bank debt, net working capital deficiency and convertible debentures. The convertible debentures are convertible into common shares at prescribed prices so for the sake of analysis I will add them to the fully diluted shares and only consider the debt to be the sum of the bank debt and working capital deficiency. For PBN the total debt is $698 million. The fully diluted shares outstanding if you include all options and convertible debentures is 207.7 million shares. Petrobank owns 58% of PBN.

NAV10-BT 1P = ($2460 million – 698 million) / 207.7 million shares = $8.48/share

NAV10-BT 2P = ($3650 million – 698 million) / 207.7 million shares = $14.21/share

The PBN shares closed today at $22.84, a sizeable premium to the reserves. This is a 61% premium to the 2P reserve value.

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.

2) Secondly, Petrominerales (TSE – PMG). The NPV10-BT is $1.46 billion for 1P reserves and NPV10-BT is $2.08 billion for 2P reserves. Again they have a convoluted debt structure similar to PBN (I will comment on the stock options below). PMG has no debt and net working capital of $67 million. PMG however has significant convertible debentures and they will be converted into equity (as per the company's formula) again for the sake of analysis. Fully diluted shares outstanding total 125.9 million. Petrobank owns 66% of PMG.

NAV10-BT 1P = ($1460 million + $67 million) / 125.9 million = $12.12/share

NAV10-BT 2P = ($2080 million + $67 million) / 125.9 million = $17.05/share

The PMG shares closed today at $25.45 again a sizeable premium to the reserve value. This is a 49% premium to the 2P reserve value.

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.

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

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.

Total Company Value

So if we take the sum of the parts for the probable basis (2P), the total equals $3.49 billion or 31.76/share of PBG. PBG currently closed today at $40.46/share. On a proven basis (1P) and including heavy oil assets, the total is $2.39 billion or $21.73/share.

Now the value of the company will vary depending on the discount rate you choose and oil price. I would guess the company is being valued at a discount rate of 7.5% and $80 oil and $5-6 AECO gas price and the current proven and probable reserves (2P).

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.

I will add that this analysis is for a specific point in time (Dec 31, 2009). I have not analyzed the company’s return on invested capital for the last several years. That will tell us how well management has done drilling new wells and if they are earning positive returns on capital. PBG’s return on equity was 20% in 2008 and 4% in 2009. Returns on total capital are obviously less than that given the leverage these companies use. If someone would like to calculate please go ahead but I don't see any value in light of what else I dug up in the financial reports on stock options.

Stock Options – Where can I get some?

The main reason I wouldn’t touch any of these companies with a ten-foot pole is the deferred common shares and the incentive shares. Both of these are basically stock options and I quote:

In the second quarter of 2010, shareholders approved an incentive plan for directors, officers, service providers and employees. The plan allows the holder to receive one common share upon the vesting and payment of $0.05 per share exercise price. The terms of the incentive shares granted are determined by the Company’s Board of Directors but typically, incentive shares vest after four years from the date of grant and expire between five and 10 years after the date of grant.
Now if that isn’t lucrative, please let me what is. Essentially they are options priced at $0.05/share and expire 10 years after the grant date.

Now if that isn’t lucrative, please let me what is. Essentially they are options priced at $0.05/share and expire 10 years after the grant date.

Can someone explain how these options align the interest of the shareholders to management and employees? Why $0.05 per share and not $0.01 per share? Why leave the nickel on the table? What shareholder would agree to these terms? Oh that’s right, Petrobank is the majority shareholder in both PBN & PMG, go figure.


Reread the last paragraph, be careful investing in ideas found on investing websites before doing your own analysis. I leave you with a quote from Warren Buffett.

“The market, like the Lord, helps those who help themselves. The market unlike the Lord, does not help those who know not what they do.”

Disclosure (1) – No position in any of the securities mentioned

Disclosure (2) – I dedicate this analysis to David Einhorn

My blog is canadianvalueinvesting.blogspot.com

About the author:

Kevin Graham
I am a Professional Engineer from Canada. I am over the top passionate about value investing and reading. If I could get paid to read annual reports for a living I would gladly switch careers. Feel free to contact me at Kevin4u2(AT)hotmail.com. My value ideas can be found on gurufocus and at my blog canadianvalueinvesting.blogspot.com

Visit Kevin Graham's Website

Rating: 2.7/5 (18 votes)


LwC - 7 years ago    Report SPAM
This is getting interesting. First some guy who calls himself "Devon Shire" shows up and publishes lots of articles under the alias "CanadianValue" from his blog called Canadian Value Investing. Many of his articles are oriented towards oil & gas companies.

Now we get Kevin Graham, who has a blog called Canadianvalueinvesting and in the above article he challenges "Devon Shire's" analysis of Petrobank.

Well, I can't find anything about this "Devon Shire" character, except that in his blog author profile he announces that he's waiting for someone to give him lots of money to invest ala Michael Burry. (Good luck with that LOL.)

I also can't find any independent information about Kevin Graham, who claims to be an engineer, although there are several engineer "Kevin Graham's" listed on linkedin.

However, in the past I have discovered "Devon Shire" (CanadianValue) plagiarizing, and responding to his own articles under the guise of other assumed aliases in order to praise his own work. I also discovered that he has a rather unsavory reputation on the Yahoo ATPG message board, and apparently Yahoo has locked his login several times.

IMO Kevin Graham appears the more credible author. Unlike "Devon Shire", Mr. Graham provides some information about himself and his background in his blog. He claims to be a engineer working in the oil & gas industry, so presumably he has some education and experience to draw on when opining on companies such as Petrobank. Hopefully he and "Devon Shire" are not one and the same person, which I guess is possible considering "Devon Shire's" prior antics.

BTW thanks for taking the time to write a contrarian view, Mr Graham.

Dreadlordnaf - 7 years ago    Report SPAM
I've been considering buying Petrobank based on my own research combined with various analysis I have read. The one flaw I find in your analysis is that you rely on one single indicator, NPV. While I consider myself typically skeptical of over hyped stock reviews, i also find myself skeptical of using one single indicator to value a company. Even though people like to think NPV is the all encompassing number that shows better than most what the true value of something is, if it were really that simple, to boil everything down to NPV in order to know which stocks are over or under priced, we would all be quite rich and spending our time on the beach, not debating valuations on the internet since its actually pretty easy to calculate. But it's not quite as accurate though is it in predicting a company's value and where their share price will go?

I think you need to combine NPV with other valuation indicators, price to earnings, price to sales, price to book , return on equity (as you mentioned), etc.. Looking at these values combined, petrobakken and petrominerales don't appear as overvalued compared to their peers as your analysis would suggest.

I am looking for a good contrarian analysis for petrobank to counter the pro ones out there. Unfortunetly yours here doesnt quite do that as its a little too ideally simplistic :(

Kevin Graham
Kevin Graham - 7 years ago    Report SPAM

I can assure you that we are not the same person. When I read someone who claims to be a value investor and quotes analysts they are no value investor. A value investor values the assets and doesn't make pie in the sky estimates.

I am relatively new to blogging and these sites. I will tell you that I find little "value" in what is discussed on many sites. Mostly bunk. When someone claims to be a value investor and doesn't disclose what I I found in the footnotes of the PBN, and PMG reports, they might as well remove the "value" from their website.

Kevin Graham
Kevin Graham - 7 years ago    Report SPAM

You are absolutely correct in your appraisal of my analysis, it is simple. The problem is you have to start somewhere and valuing the assets that are currently on the books is the best place to start. From there you have to look at how well management can invest capital and the opportunities the company has to drill.

Your comments also remind me of what people said during the dotcom bubble, "you have to look at other factors such as...". Of course you do, but lets be realistic. Either you have to 1) use a lower discount rate for the cash flows or 2) have a higher forecast of oil prices going forward. How else do you think the company makes money? Starting with the base assets and assigning a value to them is the best place to start valuing these companies.

Once you value the assets and then start to assign additional value for soft items, you are no longer a value investor but a speculator. The market is full of people speculating on resource companies and who will make the next big discovery.

As yes it really is quite easy to perform this analysis and determine which one are over and undervalued. The problem is people are too lazy to do the work in order to find value in plain sight. There are opportunities out there and I know of at least one O&G company that is below their NAV as calculated above.

I remember one professor in university who used an sample problem from our textbook for our midterm exam question. Half the class failed. All you had to do is open your textbook and read it.

Anyway, please let me know how your "more advanced" analysis would value this company.

Yours Truly,

Dreadlordnaf - 7 years ago    Report SPAM
The dotcom bubble comparison seems out of context. Had you looked at any of the basic indicators I mentioned above, p/e, p/s, p/b, roe, etc, to give you a macro view of them, nearly every dotcom company would've looked like absolutely horrible investments, and frankly most of them were. Though ironically, NPV is what companies who have no real profits (like those dotcoms) use many times to try to justify their price based on expected future income, rather than real fundamentals. So not sure if you just used the dotcom example by mistake, but that is one time when NPV alone had shortcomings.

My "advanced" analysis shows absolutely nothing special about petrobakken or petrominerales based on a combined look at their valuation indicators. They seemed valued within a reasonable range of their peers. Not screaming buys, but not quite dogs either. Thus the basis for buying petrobank is that you get two fairly priced companies, plus the opportunity for growth in the heavy oil and THAI areas, for a fair price compared to other canadian oil firms. Im still undecided on buying but will continue to research and they are definitely on my list of potentials.
Mla - 7 years ago    Report SPAM
This is a great, thank you. I hope the two of you will continue to debate this stock and help us all learn.
CanadianValue - 7 years ago    Report SPAM


Why did you have to pick a blog name so close to mine ? That will be confusing.

I read your article. I have to ask, how much time did you actually spend researching this company.

I've got some comments. Posted below and on my blog. You really weren't very nice by the way.


"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:


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."
Kevin Graham
Kevin Graham - 7 years ago    Report SPAM
Come on Devin you can't be serious? I was the one who was mean?

First there is so much bunk in your response 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. As for how long I spent, I spent over 6 hours reviewing the AIFs, 2009 annual reports, an the latest quarterly reports. How about yourself, how much time did you spend reading Alan's research reports?

How can you personally write such a rosy review of Petrobank and not even mention any negatives? Did you not even know about the stock options? I presented the other side of the story and you don't seem to like it.

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 values.

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.



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.

Razorfangius - 7 years ago    Report SPAM
If the subs are publicly traded at a certain price, I'm not sure it's fair to discount that in your analysis of Petrobank. Petrobank can sell them, trade them, spin them off, borrow against them, etc.

Just because a company owns an overpriced asset doesn't mean it can't exploit that asset for the benefit of shareholders. Not saying Petrobank's management will, but ... they could theoretically ...

I agree with you about THAI and don't see any huge margin of safety for people who buy Petrobank at the current price, but you may have been unduly harsh in your treatment of the subs.
Dreadlordnaf - 7 years ago    Report SPAM

Your response doesnt actually respond to his response. He made at least some effort to justify why he thinks things are valued the way they are. I dont necessarily buy all his claims 100% and am going to look up some of the points he cites. But your response to him was basically "because its not easy to value them, the value must be zero." This seems like a very poor way to analyze things.

I think the difference is he is taking a calculated risk-based approach to value investing, and you are not. Meaning if some investment has a 50% chance of yielding a 1000 dollar payoff, then the fair price of that investment is 500 dollars. But if you can buy that investment for less than 500 then you are getting a bargain based on the risk you are taking. This seems to be the way he is valuing petrobank, hinting that yes there is partial speculation involved, but you are paying much less than you normally would for that speculative position compared with the potential payoff. Your analysis seems to write off all cost/benefit analysis like this as having zero value though. Im curious why?

Dealraker - 7 years ago    Report SPAM

I share your views.
CanadianValue - 7 years ago    Report SPAM


Have you heard of Candelilla ? Let me help.

Your simple analysis of Petrominerales uses only the 2009 year end reserve reports.

In 2010 Petrominerales has hit 3 exploration wells on the Corcel block. The wells are known as Candelilla 1, 2 and 3. Together they have already doubled Petrominerales production from Q409.

They are not in the 2009 reserve reports that make up 100% of your valuation.

Because you aren't familiar with this company you just missed half of their production and half of their reserves.

You also assign zero value to the other 7 million acres despite this company hitting at 90% on their exploration wells.

Will you admit that this is a very material error in your analysis ?

Here is some detail on Candelilla from Alan Knowles. I know you think that listening to someone with years experience following the company is a waste of time. But some others might find it interesting.

Hester1 - 7 years ago    Report SPAM

Dedicated to David Einhorn? What the hell?

If you think your "analysis" is anywhere near a typical David Einhorn analysis you have a lot to learn. Go read David's 130 some odd slide presentation on St. Joe to see what a real analysis looks like. I am not bullish on the stock but by reading your article you are clearly a relatively new investor who is a little overconfident.

Several problems in your analysis:

1. No thoughts on the price of oil, which makes a big difference in PV-10

2. Companies that can compound reserves (by new discoveries) are worth more than NPV. NPV is basically book value. If a company is compounding book value at 20% it is probably worth 2-3 times book (assuming it is high quality). I'm not saying that any of the subs are doing that, but your "analysis" didn't talk about exploratory potential or historical reserve growth at all.

3. The stock options are just a different form of restricted stock. It is common that companies pay executives partly in this way, to allign incentives with the long term stock price. Your critique of the use of low cost options leads me to believe you haven't studied many companies, which is fine, just don't go around acting like your Einhorn 2.0.

4. When presenting a bearish view, you should be overly liberal with your estimates. The thai technology, although hard to value, is definitely not worth zero. Just because Baytex and Shell sold doesn't necessarily mean they think the technology is bad, it could mean Petrobakken is excited about it and wants to own more of it.

In any case, you should of looked at the sale prices that Baytex and Shell sold at, and you could of got a value based on that.
Kevin Graham
Kevin Graham - 7 years ago    Report SPAM

Hi Devin,

Thanks for your comments. You are absolutely correct that the discovery isn't included in the 2009 reserves. That said the stock premium to the reserves reserve value makes me think that this discover is already priced into the company.

I made few comments about the value of total company in my analysis. I summed up the value of the 2P reserves and compared to the stock price. You seem to think the company is worth $80 per share. That is fine.

Can you please offer some breakdown of your $80 value of the company? I have given you the starting point with the base reserves. Please value the land, recent exploration results, etc. Your previous article was just a discussion of relative stock prices and where the stock prices are going based an analyst's opinion.

If you think this recent discovery by PMG will more than double the companies reserves you are free to believe that. I will need a better breakdown.



Kevin Graham
Kevin Graham - 7 years ago    Report SPAM

Thanks for your comments. How do you know my age and experience?

1) I did discuss the price of oil used in the valuation of the 2P reserves. Please reread the article, I said it was based on $80 oil and $5-6 AECO gas. Readers will have their own opinion of where oil prices are going and they can invest accordingly. I personally have no idea where they are going. Canadianvalue believes this company is worth $80 per share, and didn't even mention the price of oil. If the bear case requires a discussion of oil prices surely a $80 price target better be an entire discussion of it.

2) You comparision to book value is correct. Obviously trading above book in the O&G sector is a huge bet on management. As for compounding at 20% that seems to be a stretch as PBG as the ROE has been between 4-20% over the last two years. Returns on invested capital will be lower given the leverage the companies have been using. The use of convertible debentures opens a whole other discussion.

3) Restricted stock. This is not restricted stock for executives. It is low cost options for exployees and service providers too. How does this align the long term interests of the company to those who get these options? They are a blank check, is what they are. By offering options at least priced at current quoted prices the reward is aligned if the stock price increases. These options are truly, "heads I win big, tails I still win big." Lastly, these are not common compensation in the Canadian oil patch.

If I bother to do more analysis on PBG it will be a comparison of yearly profits to the cost of these options.

4) THAI. I presented the bear case, if you don't like it you are free to assign any value to it you like. That is what makes a market. My bear case was to counter claims that this is a Guarenteed, "heads I win big, tails I still win big." That is simply not true and there is downside to this investment like any other.


Energywonk - 7 years ago    Report SPAM
P/E at ~18. not 8 as buffett prefers. interesting company but overvalued by value investment standards. enough said.
Kevin Graham
Kevin Graham - 7 years ago    Report SPAM


Upon reflection, your analogy comparing NAV to book value is entirely wrong. My comments above should read NAV not book value.

Book value will be the capex less depreciation. NAV is the value of the reserves at current strip prices.

A company should trade above book value or else they have made capital investments with negative returns. The NAV will change up or down yearly based on current strip prices and the production profile.

A company trading at 2-3 times NAV where the NAV is based on current stip pricing is clearly not a value investment. However if they have made a significant discovery the past year, the NAV will be higher. That said NAV will increase based on the level of capex plus any returns on capex. When you net out the debt and equity changes you determine if the total company NAV has increased or decreased.

Let me know if this doesn't make sense.


Hester1 - 7 years ago    Report SPAM

This will be my last post on this topic, because I don't like to get in these arguments, especially when I have no dog in the fight (I am neither long nor short nor bullish or bearish at all on the stock). I usually don't respond to weak analysis, as I see it all the time, but in this case I felt like you were overly confident, and yet you came up with no special analysis to back it up. In other words, you talked the talk but failed to walk the walk.

I don't know you're age but I can tell that you don't have much experience by your analysis and your confidence level. I am sure the market will humble you in time.

1) I know you assumed $80 dollar oil, but you didn't mention if you are bullish or bearish on oil.

2) I never said that these companies are 20% compounders, please feel free to read all of my post

3) Many companies pay their employees partly with restricted stock or low cost options in lieu of a cash bonus. Again, you will learn this as you analyze more companies.

4) You really have much to say here other than "I am presenting the bear case." I stand by my original thoughts.

As for your second post, your experience really shows. NPV is merely part of book value for companies with gas or oil reserves.

You said,

"Book value will be the capex less depreciation."

Do you really believe that? There are so many ways a company can increase or alter book value other than by capital expenditures I don't know where to begin. Capital expenditures mainly just increase PP&E.

Batalha - 7 years ago    Report SPAM
I have spent no time in analysisng this case. However, I would take with a grain of salt company's estimates of BOE proven reserves. First of all, these numbers are usually juiced up on purpose (mgt incentives, stock price boost). Second, many oil companies acquire gas companies and book their reserves as BOE equivalents (I dont know of that is the case here tough). Third, as Mr Graham pointed out, if Petrobank net back is negative, they are destroying value instead of creating it. That means that either management is not good or they are a high cost producer in which case you should stay away from this stock unless you are an active investor..
Dymas9999 - 7 years ago    Report SPAM
Hey Kevin, put your money where your mouth is and short this puppy until a hole of doom if it is so undervalued.
Kevin Graham
Kevin Graham - 6 years ago    Report SPAM

Hey Kevin, put your money where your mouth is and short this puppy until a hole of doom if it is so undervalued.

Thanks for your comment. I wish I would have.


Kevin Graham
Kevin Graham - 3 years ago    Report SPAM

Looks Like Devon was wrong. 


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