Petrobakken: What Does the Company See for 2011? – CIBC Energy Conference

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Apr 19, 2011
I’ve written about Petrobank and its publicly traded subsidiary Petrobakken (PBN) before for GuruFocus:


http://www.gurufocus.com/news/109940/petrobank-energy-pbegf--an-exceptional-riskreward-scenario


The story has been a bit boring since then with no production growth from Petrobakken and not much new at Petrobank the parent. The nice part of the story has been the subsequent spin-off of the Colombian subsidiary Petrominerales which has increased in share price from the low-to-mid $20s to $33 today on the back of some $10k-per-day exploration well successes.


2011 should be a more interesting year for shareholders as Petrobank the parent has gone into full commercial development of their heavy oil project at Kerrobert. After developing their THAI technology for over five years, Petrobank management is now comfortable taking the next step with it, and shareholders will be watching on the edge of their seats.


But what could drive an increase in share price in the near term is improved performance from Petrobakken, which in 2010 struggled to digest three acquisitions, wet Canadian weather and fracking problems in their northern Bakken property. Petrobakken initially started trading at over $35 per share and now languishes at just over $17. I’ve put together some notes from their most recent presentation at the CIBC Energy and Infrastructure Conference to help determine if 2011 will bring some better days to Petrobakken shareholders.


CIBC Energy and Infrastructure Conference


Gregg Smith President and COO


Business model of finding large resource plays and the then applying new technologies to extract the oil in place


My comment: Petrobakken is given credit for “cracking the code in the Saskatchewan Bakken along with oil services company Packers Plus”


Light Oil Focused (85% light oil)


Exited 2010 around 41,000 barrels per day, now at about 43,000 barrels per day with an inventory of wells already drilled and waiting to be put on production


My comment: In the last quarter of 2010 they drilled and completed but held off fracking 15 wells in the Bakken until they had perfected a new technique. As they go through and frack these wells there should be a lift in production near term. Petrobakken was struggling with the fractures breaking through the Bakken zone and creating much higher than anticipated water cuts. The company believes the new technique has addressed this issue.


Key Assets:


Southeast Saskatchewan with the Bakken


Second largest land owner in the Cardium


Natural gas assets in Northeast British Columbia (Montney and Horn River) on the back burner until the price improves


Very high netback production, royalties 15% of production and operating costs of about $9 to $10 per barrel.


Cardium is the growth engine going forward, plan to keep Saskatchewan production flat


Where will money be spent in 2011?


In the past two years most money was spent in the Bakken; in 2011 it will focus on the Cardium.


It breaks down as follows:


$345 million: Cardium


$185 million: Bakken


$40 million: Conventional


$70 million: Facilities


$40 million: New Ventures


$120 million: Other


Total: $800 million


Bakken Details


430 Net Sections of Land


Over 900 locations (344 booked at 2010 year end)


My comment: As the property is drilled out, reserve engineers allow reserves to be booked on the additional locations. Of their large undrilled inventory, just over a third have been credited with reserves.


Bilateral evolution in the Bakken involves downspacing to two wells per quarter and eight per section (from one well per quarter and four per section). Downspacing has added 50% to reserve bookings per section, so you go from a 12.5% recovery to 18% recovery. One way to achieve this is to drill a second horizontal leg in the quarter section; Petrobakken has found it much more efficient to drill bilateral wells instead, which cost $2.58 million instead of $3.96 million for two single-leg horizontals.


So the bilateral revolution means that you increase reserves by 50% per section that this is applied to, but the cost of increasing the reserves is only $2.58 million. $1.98 million = $0.6 million, or $0.6 million/$1.98 million = 30%.


So over time as more bilateral are drilled, this increase of 50% will add to the 2P reserves that Petrobakken has per section of land.


Enhanced Oil Recovery in the Bakken


In February 2010, they went into an area in the Bakken that was already depleted through production and for two days injected CO2 into a well. The offsetting wells immediately doubled and tripled their production respectively and almost 10 months later are still producing twice as much as their original decline curve would have indicated. A pretty dramatic result considering the injection was for only two days. In 2011, a full scale pilot will be carried out with natural gas injection (which they prefer to CO2). Expect results later in the year.


My comment: Petrobakken spoke about EOR on the last conference call and suggested that eventual recoveries from the Bakken will likely be over 30% of the oil in place. This compares to current reserve bookings that credit 15% recovery rates. These are the numbers that competitors such as Crescent Point have suggested as well. There could be a lot of upside in these companies if they can double reserves through EOR with only a small increase in cost of development.


Conventional Resources in Saskatchewan


Have been facility constrained and expect to add about 1,000 barrels of production in 2011.


Cardium


Petrobakken closed three acquisitions of Cardium property in 2010. Since then the play has been de-risked by Petrobakken and other companies drilling in the play.


A big development since the acquisitions that seems to get little attention is that Alberta changed its royalty rates. The impact to Petrobakken is that the changes have improved the Cardium economics by roughly $1 million per well. When you consider they have about 1,000 locations to drill, that means that the government change made these acquisitions 1,000 x $1 million = $1 billion more valuable. The total cost of the acquisitions was just over $1 billion, so you would think investors would be very interested.


My comment: It's a bit hard to get my head around how there isn’t a little bit more excitement about what Petrobakken has added here through their Cardium acquisitions. They thought at $70 oil that the Cardium properties were worth their while to spend $1 billion on, with the expectation that it was a good investment. Subsequent to their acquisitions, a royalty change adds $1 billion of value to these properties, the drilling results come in at least as good as expected, and oil is over $100. Seems like the timing of their entry into the Cardium should result in a home-run investment, not a languishing stock price. I guess the market doesn’t care until it sees the production.


The problems they are having today are that the acreage cost in the Cardium has now gone way up due to the de-risking of the play, and they are having a hard time adding to their land base.


65% of their land is in the West Pembina, 25% in the East Pembina and 10% in Garrington


I believe they have 1,000 locations in the Cardium. NPV10 per well is roughly $4 million (at $75 WTI) according to PBN.


West Pembina has clearly the best performing wells that will produce likely over 250,000 EUR. East Pembina will likely produce approximately 170,000 EUR (but is less costly to drill).


They are closing in on 10,000 per day of production in the Cardium. Up-front land costs are now behind them, and future spending is on the drilling and facilities. They are down to 20 wells in the queue waiting to come into production (it was 27 at last update).


Summary/Q&A


They are still guiding 46,000 to 49,000 per day as the exit rate for production.


The answer to when they will have results on the EOR project was late in 2011. They will ramp up the activity in late 2012 and early 2013, which will be when the benefits will start to show up.


Answer to spring breakup, they are pretty much shut down now, and expect to be back drilling at the end of the second quarter in Saskatchewan and Alberta.


My final comments:


I think I need to be patient with this one.


1,000 Cardium locations with a PV10 of about $4 million = $4 billion in value.


900 Bakken locations with a PV10 of about $3 million = $2.7 billion in value.


350 Conventional locations with a PV10 of about $2 million = $700 million in value


400 Northeastern BC natural gas locations worth ???


Add those all up and you are well over $7.4 billion vs. an enterprise value of roughly $4.8 billion. And that is using $75 oil, not $110 oil, and assumes no incremental recovery from EOR techniques.


Of course the key for me is that I need Petrobakken to simply be worth close to what it is currently selling for so that I get the parent assets (600 million to 700 million barrels of heavy oil and oil sands reserves) for free. Because the Petrobank share price really only reflects the value of their Petrobakken ownership.


Like everyone else I get tired of waiting for an investment thesis to play out, but when I see insiders buying in, size does make it easier: http://www.gurufocus.com/news/127532/petrobakken-pbn-insider-buying-and-news-flowtrying-to-connect-the-dots