Twin Butte Energy Ltd TBTEF

RE:The globe article

[pm1231]

I must admit, it really makes me scratch my head - this idea of selling when the stock is taking a beating - and buying after good news when the stock is going up...it completely goes against convention - but I guess if it confuses Warren Buffett as well – so I’m in good company.  I have a particular disdain for these so called experts who – on the one hand - have TBE as a “top pick” one day but all the sudden do an about face when the market beats the stock to a pulp with no real explanation why they are revising their opinion (people like Eric Nuttall come mind).  This is why doing your own homework is important – it allows YOU to identify the opportunities without being spoon-fed what analysts want you to believe.

I agree that the yield is simply a reflection of the current stock price….and does not indicate the sustainability of the dividend…if the stock were trading close to its NAV - it would be yielding closer to 6%.  Moreover – from a total payout perspective – TBE is still below the industry average at current production levels and have stated their objective to revise CAPEX if necessary to maintain the dividend.   I don’t know why some market participants doubt management’s intentions in this regard.  Thier balance sheet is also relatively strong at about 1.8 D/CF (assuming current CF guidance). 

This technical analysis without an understanding of the company’s fundamentals is simply mumbo jumbo BS - no disrespect to technicians who digest these indicators every day without any notion that a news event would render their technical analysis useless.   If past trends could really predict future performance – well – I guess there would be no need for fundamental analysis and we’d all be swimming in capital gains.  

I found this posting on the Baytex website a precursor of what we may see this Wednesday after the earnings are released.....its an update on Baytexs realized oil prices.  They have a similar production profile to TBE (50% heavy oil, 36% light oil) - % Oil and NGL approx - 86%. 

With the steps TBE has taken to improve netbacks (ie. via rail, horizontal drilling, focus on medium vs. heavy oil, etc)....I’m making my own bet that TBEs numbers for realized prices could be similar to those prices realized by Baytex - specifically....

Q2 Numbers

WTI – US$102.99/bbl
WCS Benchmark – US$82.95/bbl
WCS Dollar Differential – US$20.04/bbl
WCS % Differential – 19.5%
FX Rate (US$/C$) - $0.917

If you recall from the TBE presentation - they did a sensitivity analysis.....here it is as a refresher....

Oil Price (CDN) - WTI - Base Assumption - $105 CDN - for every dollar above this - has a $3 million cash flow impact after hedging.

WCS Differential To WTI - Base Assumption - $25 - for every dollar below this - has a $4.2 million cash flow impact after hedging.

Exchange Rate - Base Assumption - $1.09 - 

Running these numbers using Baytex as a proxy....

$102.99 x 1.09 = $112.26 CDN-$105 CDN = ($7.26 above base assumption x 3 million post hedging) = $21.7 M above current cash flow estimates.

WCS Differential – ($25-$20.04) x 4.2 million =  $21 M

FX Rate - No Change - 1.09.

So - using Baytex numbers alone as a proxy - the upside on cashflow could be $42 M above current guidance based on TBEs own sensitivity analysis.....seems a little high - but you get the idea - Q2 saw strong oil prices and lower differentials across many E&Ps - and TBE should see some upside as a result as well. 

Long and short of it - there is plenty of upside potential related to thier Q2 this coming Wednesday.....to put things in perspective - production on their heavy verticals would have to fall ANOTHER 11% on top of the revised guidance given at Q1 to completely offset the potential upside of higher oil and reduced differentials based on the analysis above...netting to zero.

We know they are drilling horizontals to reduce the declines despite their legacy heavy oil assets higher decline rate - so I don’t foresee another major production revision on top of what was announced Q1.....

Consensus CF estimate for Wednesday is $0.12 - $0.16 per share - from my read of analysts reports....my feel is that Q2 could very well exceed consensus CF per share estimates by a wide margin...and if they do  - lets assume even half of the $42M based on the sensitivity analysis above - say $20M above cash flow forecast....they can

a) Pay down debt to bring D/CF closer to 1.5
b) They can increase CAPEX with a CF surplus and bump up production for 2014
c) Or build their cash reserves for a potential acquisition which they’ve stated is an objective....
d) More importantly – total payout ratio for the quarter will be significantly below 100% if the above scenario materializes - diminishing any dividend sustainability fears.

Any of the above could move the stock higher assuming a good quarter. 

If you’re a technical guy - do as Lou says and wait - if you’re a fundamentals person - the risk reward is VERY attractive at this level with a locked in 11%+ yield and significant upside.
 
Here is the full post from Baytex below.....

As always - don't play with money you can't afford to lose.  With investing - there is always risk and there may be some unforseen negative event (PWT comes to mind with thier accounting issues)...that drives the stock lower.  But aside from that, i'm not concerned about the sustainablity of thier dividend - it's more than safe from my perspective (relative to other E&Ps).
 
Good luck.

__________
Q2 2014 Heavy Oil Pricing Update – July 4, 2014
In order to assist analysts and investors in understanding heavy oil pricing, we provide this quarterly heavy oil pricing update. Our production mix pro forma our acquisition of Aurora Oil & Gas Limited (which  was completed on June 11, 2014) is approximately 86% liquids (50% heavy oil and 36% light oil and  natural gas liquids) and 14% natural gas, based on a 6:1 natural gas-to-oil equivalency. Approximately  80% of our heavy crude volumes are priced off the benchmark heavy oil price, Western Canadian Select  (“WCS”). The WCS Index quoted represents a blended volume weighted average of Net Energy and  Shorcan trades.
 
Benchmark prices for the second quarter of 2014 were as follows:
WTI – US$102.99/bbl
WCS Benchmark – US$82.95/bbl
WCS Dollar Differential – US$20.04/bbl
WCS % Differential – 19.5%
FX Rate (US$/C$) - $0.917
 
Market conditions remained positive in Q2/2014 – the discount for Canadian heavy oil, as measured by  the WCS price differential to WTI, averaged US$20.04/bbl (or 19.5%) as compared to US$23.13/bbl (or  23.6%) in Q1/2014. The strong market conditions reflect a number of positive catalysts unfolding in 2014, including increased refinery demand in the U.S. Midwest, a continued increase in crude by rail volumes  and a number of pipeline capacity improvements and expansion projects. WCS differentials for the April, May and June trade months averaged US$22.47/bbl (22.0%), US$19.07/bbl (18.7%) and US$18.59/bbl  (17.7%) of WTI, respectively. Recall that the heavy oil differential on a trading basis is set one month in advance of WTI, so these differentials were set during March, April and May calendar months.