RE:Punjabi may be on to somethingOcean, TBE is my second largest oil position after PWT, thus I do follow it to a large extent. In regards to your questions here are my comments:
Decline rate: As has been highlighted by other posters vertical wells decline exponentially and they don’t flatten out, thus they continue to derive the decline rate lower as they age, albeit their impact will decrease as they become a smaller percentage of production. Meanwhile, all HZ fracked wells decline aggressively in the earlier phase of their life; with TBE accelerating this type of drilling, it is not surprising that their decline rate is still high; this should flatten out few quarters out (in May 2014, the company indicated that legacy decline rates at Provost stand at under 20%). Also, the decline rate cannot be looked at exclusive of capital efficiency, TBE has an IP365 capital efficiency of $23K this is a very healthy metric and superior to the vast majority of its competitors in the Canadian Western Basin. It is because of this attractive capital efficiency ratio that TBE is able to maintain a solid payout despite a high decline rate.
Drilling budget / production: It is not sufficient to look at the headline production numbers, it is true TBE is keeping production flat with a 10% increase in capex, but the production mix is tilting to more medium grade oil, this is why total cash flow and most importantly cash flow per share is rising. In the end what matters is not barrels, but how much money the business is generating per share.
As for the gas/oil ratio, I wouldn’t worry about that number that much, this ratio has been trending in the 88% to 90% range for several years, there will always be some movement in this ratio as drilling hits various zones and formation, but the area where TBE is drilling is not known to be NG heavy.
The two issues that need to be addressed with TBE over the next few quarters are:
Drilling inventory: TBE has a relatively small drilling inventory; the company needs to continue adding to this inventory organically and inorganically. They seem to be delivering from the organic side with Sparky and Lithic. But, in terms of inorganic additions, the dilemma is that
TBE valuation is very low, which in turn makes any share driven acquisition potentially dilutive. I do trust however in Jim Saunders ability to spot an accretive deal and make it work despite the valuation penalty. The acquisition of Blackshire was very astute and was done under good terms despite a more competitive bidding environment for oil assets at the time.
Production consistency: the company has underwhelmed in terms of production estimates and delivery over the last several quarters, they need to get a handle on their production profile and improve their production projections accuracy. I was glad to see changes at the COO level back in May after several production failures by his successor, but we are yet to see a material production impact as a result of those changes.
It is worth noting that it is rare for a company to trade at a double digits yield and a discounted valuation if it had no meaningful issues. TBE has its challenges as highlighted above, but I believe those are manageable and holding/buying the shares at current levels should yield an attractive capital gain and dividend return over the next couple of years in the context of a rebounding oil price.
Regards,
Nawar