PBN Research - My Two Cents
Interesting notes on this site. I’m new here. For those of you looking for some reassurance on PBN – here is my insight based on some comprehensive independent research. As with any investing – there are always risks. My key to investing is to model plausible risks and take a position based on the cost benefit of that risk. That said, for the sophisticated trader/technician - I would welcome comments or validation to my analysis (in case I may have missed anything).
The scenario I have modelled that paint a rather compelling long term picture for PBN.
Parameters
1. WTI prices underestimated based on current research reports
a. CIBC research reports assumes WTI at $90/bbl
b. As of March 27, 2013 – WTI trading above $97/bbl
c. EAI and OPEC projections for 2013 peg WTI around $92/bbl with demand forecast increased early this year
d. Plausible Estimate - $92/bbl avg. Price through
2. FX rate harder to predict – but should be on par with $US
a. Current rate at $0.98 with increase over last month – can’t predict trajectory given uncertainty in global markets.
b. Depends on uncertainty with Europe, global growth, etc. and flight to perceived safety with US dollar/US Treasuries (ie. Firming up US dollar relative to CAD)
c. If global economy picks up (ie. China, Europe, US, BRIC GDP) – expect risk on trade with bump in commodities (and subsequent increase in CAD relative to US).
d. Plausible Estimate - $0.98 - $0.99
3. WTI Differentials Should Fall Towards Q4
a. Per last call – current differential at 7% and should continue downward trend.
b. Net inventories in Cushing, OK have fallen as of last week
c. Brent to WTI spread falling (to lowest levels) – expect WTI to increase and Brent to decrease – as we approach Q4 2013.
d. Significant new capacity is being built to reduce the glut in Cushing, irrespective of approval of Keystone XL - Alberta to Cushing (ie. Cushing to Gulf Coast projects are on track) – will alleviate glut in Cushing, OK
e. PBN may rally on Keystone XL approval , but nevertheless – as we approach Q4 2013 and into 2014 – expect volatility in differentials to stabilize and drop significantly.
f. Plausible Estimate – WTI Differential - Annualized– 6%
4. Natural Gas On The Rise
a. Nymex and AECO spot above $4.00 and $3.5 respectively
5. Assume PBN hits median range of 2013 guidance
a. 40,000 BOED per day – Oil & Liquids
b. 42,000 mcf – Natural Gas
c. Translates into approximately 47,000 BOED – or 10% increase from 2012 levels (in line with guidance of 8%-12% increase in average production)
6. Assume following for Operating Netback and Cashflows
a. Royalties at $9.89 per BOED
b. Transportation at $0.50 per BOED
c. Operating Costs at $13.63 per BOED (Assume increase in operating costs for Cardium higher gas weighing requires processing by third parties)
d. G&A at $2.81 per BOED
e. Interest, Tax, Other at $6.7 per BOED
7. Shares Outstanding At Year End – 196,000,000
8. Net Debt at Q4 2012 – $2.042 billion
9. Assume DRIP Participation at 30% - (conservative – should approach 50% based on management guidance)
10. Based on these parameters – my model predicts the following (Per BOED)
a. Gross Sales - $75.32
11. Less
a. Royalties - $9.89
b. Transportation - $0.5
c. Operating Costs - $13.63
d. Admin - $2.81
e. Interest, Tax, Other - $6.7
12. Estimated Cashflow Per BOED - $41.79
13. Cashflow projection – (assuming 47,000 BOED avg. Production for 2013)
a. $716 M (at 196,000,000 shares outstanding)
b. Cashflow per share - $3.66 (current estimate at $3.5 on high end)
c. Cash Payout Ratio – 18.37%
d. Debt to Cashflow falls dramatically from current 3.4 to 2.8 – market should jump on this
e. Should PBN decide to increase CAPEX for 2014 – lets assume back to $900M – they would have to borrow $314M – ($716M less $131M cash dividend = $585M + $314M to cover shortfall to $900M)
f. This would bring debt higher to $2.4 B – however – debt to cashflow should remain under 3.0 (closer to 2.9) if they can use the cash to generate higher output for 2014.
14. Conclusion
a. Plenty of upside potential for those who are long. Above and beyond analysis above, Keystone Approval, any asset sales, etc – could move the stock upward
b. Much of the downside has been priced into the stock – current research reports appear to assume worst case scenarios with the parameters described above - but do not appear consistent with current market trends for WTI, Nat Gas, etc.
c. Key is finding entry into the stock – analysis suggests support at $8.70 (tested twice) – double bottom formation and did not break support – but definitely in downtrend with lower lows over last 9 days (bearish indicator). Sell stop if break $8.7 support but likely some upside come next week if double botton formation holds.
d. If above scenario holds – can easily see a price target in the $13-$16 range as we approach Q3 and Q4 2013 - but it will be a bumpy ride!