Why a strategic Pinecrest sale could unlock value for shareholders
A Pinecrest sale
In addition to land, Pinecrest currently has around 2,300 boe/d in production and 16,241 Mboe of proved and probable reserves. A quick analysis of Slave Point region competitors shows that the average competitor trades for 40% higher on P+P basis and Pinecrest has a higher 32% higher oil weight, 97% versus 74%.
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Below are a couple of transactions that occurred over the past few years in the Slave Point region:
- December 2011: Surge acquires private company in Slave Point
- Terms: 106 million for 1,200 boe/d = $83,000/ boe
- March 2012: Renegade acquires assets in Slave Point
- Terms: 11 million for 50 boe/d = $220,000/boe
Obviously the terms of these deals vary significantly, but what’s important to note is there are numerous companies selling for much higher on EV/boe/d basis and integrating PRY could be quite advantageous given the companies land base and net sections available for drilling.
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Baytex and Surge are two easily identifiable names selling for higher EV/boe/d. Additionally, Penn West has announced that they plan to unload non-core assets within the region. A number of companies, including Surge, have expressed interest, signifying demand continues to remain strong for assets in this location.
To summarize the overall value Pinecrest continues to possess, land value alone could be worth between 20% and 50% higher than current enterprise value. Factor in benefits such as CAPEX value, overhead reductions through consolidation, and tax loss/tax pool structures, and PRY could add between 50% and 100% to current prices.
The conclusion to this report is quite simple. The board and management of Pinecrest were given an opportunity to develop, oversee, and run a sustainable oil and gas E&P company in a highly sought after region of Canada. They blew it. Management over-projected, under-delivered, failed to update when problems surfaced, and ultimately ruined confidence in operations. The board of directors is expected to monitor management actions and guide management in the best interest of shareholders, which they seem to have failed to adequately do. Collectively, this group has run Pinecrest into the ground. Given the group’s ineptness and the now troubled balance sheet, PRY has very little flexibility to maneuver itself out of its problems. The company is now in a state of distress, with a capital shortfall, little ability to raise further capital without severe equity dilution, and a large debt balance. For these reasons, the company should ultimately be sold and the funds returned to owners, shareholders.
Shareholders should demand a sale occurs quickly because the Slave Point area is still an attractive region. Pinecrest continues to possess significant value over its current enterprise valuation, and considering management’s track record of destroying value additional time will likely cost additional shareholder money. A strategic sale should be able unlock 50% to 100% more than the company’s current enterprise value and it is shareholder’s right to demand that what remaining value is left be returned.
The Market Realist Take
A July 2013 report by Canaccord Genuity said Pinecrest has had great success in several pockets of drilling through the Slave Point “horseshoe.” They expected that the company will look to further delineate its land base, and success in these “step-out” wells will act as a significant catalyst for the stock. The report said the company’s capital efficiencies have been challenged over its first two years developing Slave Point, particularly in 2012, as infrastructure costs and attempts at downspacing to eight wells per section lead to increased costs. However, inflated capital efficiencies are not abnormal in early stage development. Pinecrest’s netback is driven by a production base that’s 99% light oil. Plus, the company benefits from the economies of scale inherent in producing from a single asset, which help to keep operating costs in check relative to other oil-weighted producers.
Pinecrest peer Penn West Petroleum is in the middle of selling its non-core assets and aims at focused oil production growth translating into improved funds flow generation and shareholder value. The company recently announced that it has closed asset sales transactions for gross proceeds of nearly $700 million, cost reductions in the business of approximately $100 million in 2013, and improved capital discipline demonstrated by lower direct per-well costs, leading to development capital reductions of almost 10% in 2013.
Another peer, Lone Pine Resources, announced on January 6 that creditors have approved its restructuring plan. The plan includes the conversion of outstanding 10.375% senior notes due 2017 and other unsecured debt into new common shares, an offering of new preferred shares to eligible affected creditors to raise between $100 million USD and $110 million USD in new capital, and the cancellation of all outstanding shares of Lone Pine common stock.