On Thursday January 27th, mid-tier Canadian oil producer Petrobakken (TSX: T.PBN, Stock Forum) announced its second Cardium area acquisition – Result Energy (TSX: T.RTE, Stock Forum). On January 4, Petrobakken bought out Berens Energy (TSX: T.BEN, Stock Forum). This play has exploded onto the screens of analysts and investors in six short months.
I found two themes in reading the media and analyst reports on yesterday’s takeover of Result Energy by Petrobakken:
1 Petrobakken overpaid for Result Energy.
2 This is the top of the Cardium market; sell.
Welllllll…I’m not convinced of that…here’s what I took away from this transaction:
1) Petrobakken just took out their major competitor for consolidating the play, and if they paid a premium to do that, maybe that was smart
2) PBN may have overpaid on production and reserve levels that analysts believe the Cardium is capable of; Petrobakken management clearly believes they can improve on what they’re now seeing in analyst reports
3) The stock chart for both PBN and its main Bakken play competitor Crescent Point (TSX: T.CPG, Stock Forum) are stalling, indicating investors don’t believe they can keep up their growth curve with just the Bakken play. CPG has moved aggressively into other oil formations in Saskatchewan; the Viking and the Lower Shaunavon. So PBN thought it needed to do something.
4) Result management and their buddies just made a HUGE pass – they put their money in at 8.5 cents only 2-3 months ago and got bought out for 42 cents – five times their money in 3 months. (Annualized, that would be 20x your money.) I love those stories.
5) But the end result for retail shareholders however, wasn’t so great. Normally a buyout gets done at least at the high of the year on the stock so all shareholders make money. But Result traded one third of its brief new life above 42 cents.
6) Raw Cardium lands now sell for as much or more than Bakken lands – wow. Not bad for a play that’s barely a year old.
Now, to be fair to the “Cardium-is-overvalued” crowd, Result management – Brett Herman et al – likely sold because they were getting outbid by Petrobakken on recent Cardium land sales. It became clear to them – or at least very likely – that nobody else was going to make it to intermediate tier status as a standalone Cardium play. So why not take advantage of the fast rising valuations surrounding the play?
(And even I have to admit the today’s valuations are assuming that all Cardium acreage is 100% prospective and every single well will be a gusher…there will be some pain at some point…heaven help the first junior that has to report it misses a Cardium oil well.)
As to overpaying, in one sense, the figures speak for themselves: PBN paid over $600,000 per flowing barrel for Result’s 750 boe/d of production. As context, that’s about 10x the average junior valuation.
But that’s not a fair valuation method. Petrobakken paid for the land. In the $480 million deal, back out $60 million cash Result had. Now, if we value the production level – and I’ll use the 1300 barrels a day production that Result will have on the official day of closing – at $75,000 per flowing barrel that works out to a value of $97,500,000. (You could argue production is worth up to $100K per flowing boe).
So back out a total of $157.5 million (60 + 97.5) for cash and production, and the value of the net 105 sections of Cardium land that Petrobakken bought through Result was $3.07 million per section, or $4800 an acre (640 acres in a section). Other analysts’ calculations have the number as high as $6000 per acre, or $3.8 million per section. Recent actual sales have been as high as $5600 an acre.
Brett Herman and his Result team sold their previous company, TriStar Oil & Gas, to Petrobakken in August 2009. TriStar, like Petrobakken/Petrobank, was a consolidator of many of the juniors in the prolific Bakken tight oil play in Saskatchewan.
Since that time Herman had moved into the Cardium, and with a big premium valuation in the stock, was poised to begin consolidating the Cardium players that had lower valuations. Every other company would have been accretive to them. He could have gone on to create another mid-tier producer.
Then came Petrobakken’s surprise take-out of Berens Energy on January 4. I would suggest few people saw Petrobakken’s move into the Cardium coming, though it’s an obvious fit. The geological characteristics of the two formations appear to be similar, and Petrobakken’s innovation in horizontal drilling and fracing could potentially increase the value of the Cardium play a lot. And the Cardium is the largest oil formation in Canada. And as I mentioned earlier, after that came the Cardium land sales, for which Result was outbid.
Herman admits he never thought of selling until Petrobakken bought Berens. He was one of, if not the most likely candidates to be the big consolidator of the play. But now he gets to find/create a new sandbox to play in.
My guess is that for the next few months, that sandbox will have a warm ocean breeze and margarita beside it. But the end result for retail shareholders is they get to stay at home.