Twin Butte Energy Ltd TBTEF

Seeking Alpha update

[Papagallo]

Test To A More Plausible Scenario [View article]

I agree with the comments on this board - particularly - "they are the best house in a bad neighborhood". I wrote my articles on Twin Butte coming on to one year ago. At the time, when WTI was hovering around $80, I did predict there was more room to fall towards $60, but as with all the pundits and talking heads on CNBC, and other mainstream outlets - no one could have predicted prices would be where they are today.

My position on Twin Butte has not changed.

1) This is a multi-year hold and things should begin to stabilize by 2017 (so we have another year to two years of price stagnation on the horizon).

2) Management has made smart moves to protect the balance sheet. However, as is with the case for every firm in the oil patch, with WTI trading between $40 to $50 a barrell and likely to stay within this range, most producers are losing money and extracting oil below their marginal cost of production. I've run the numbers for Twin Butte and they too will be stretched should WTI hover in this range for the foreseeable future.

3) They have made clear that should prices remain around $45 into 2016, they will virtually eliminate CAPEX and ride out the storm. As for the dividend, it's such a small portion of their overall spend at the moment that whether or not they cut seems inconsequential - my sense is they will try to hold on to this as long as they can since they have large funds who are holding Twin Butte for the dividend alone.

4) As is the case with all oil producers, with decline rates and zero CAPEX, when prices do recover, those who hold high debt will be in a bind. Twin Butte is at risk of this should they decide to eliminate CAPEX for 2016. Specifically, with no CAPEX, and lower production, their Debt to Cashflow may increase substantially where today it's in a comfortable range below 2.0. Prices would have to recover substantially in 2017 for them to reign in this metric...hence - like all other producers - they will be stretched.

5) As for predictions about WTI in 2017 - everyone has their predictions. You have pundits who say this is going to be a multi-year bear market with WTI incrementally going up $5 per year for the next 10 years, and others who predict prices will move towards $75-$80. I won't bother to guess because it's pointless - no one can predict with accuracy or conviction where WTI will be. What I can say factually, is that demand has increased, and non-opec supply (ie. US) does seem to be falling. However, with Russia and Saudi producing at near maximum capacity - the oil glut doesn't seem to be going away anytime soon. Specifically - the market will have to work through all the inventories of stored crude before we see a meaningful uptick in WTI prices.

6) Alberta has given some relief on royalties through 2016 so that provides some short term relief (since their focus on medium oil and the lower royalties associated with it has been a big part of their improved netbacks along with lower operating costs).

7) I am of the opinion we will see another downward leg in WTI as we approach December/January - historically - this has been a period where inventories begin to increase weekly (if you look at the 10 year chart)...so I am sitting on the sideline with Twin Butte until after January/February.

8) Is there more downside risk for TBE? In the short term - as with all oil patch stocks - the answer is yes - especially as we approach refinery maintenance and the winter months.

Again - if you are in this for the long haul - none of the above matters since you don't concern yourself with daily fluctuations.

Hope that helps.