petrobank's valuation

[k1f]

Here's a useful summary of some of the issues stalling Petrobank, a scoop from the IV BRY board:


Drilling for Petrobank's Real Value By LESLIE P. NORTON


The Canadian oil-sands outfit's shares look cheap, particularly when its stakes in two other energy companies are taken into account

SEEMS LIKE THE LAST TIME ANYONE got free oil was on the Clampett land in the Ozarks. But, these days, you don't have to watch reruns of The Beverly Hillbillies to find some. It's gushing out of the shares of Petrobank Energy and Resources.

The Canadian company (ticker: PBG.Canada) owns a big chunk of an exploration and production company in Colombia and another in western Canada, along with millions of barrels in oil sands, as well as a proprietary technology for extracting it.

Petrobank has high hopes for its oil-sands technology, which it contends is cleaner and more efficient than rival processes. Above: a project in Weyburn, Canada.

Petrobank has a 66% stake in Petrominerales (PMG.Canada), which has 53.1 million barrels of oil in Colombia and Peru, plus 58% of PetroBakken (PBN.Canada), which has 143.6 million barrels of oil equivalent in the Bakken shale formation. Thus, each Petrobank share represents indirect ownership of 1.04 PetroBakken shares and 0.62 of a share of Petrominerales. (All three stocks are traded in Toronto.) Based on Thursday's closing price, the two add up to about 47.10 Canadian dollars—about C$8.39 lower than what Petrobank's own shares were fetching. (A Canadian buck equals about U.S. 97 cents.)

THAT MEANS THAT INVESTORS get 670 million barrels of reserves in petroleum sands for free, as well as the technology that Petrobank contends is a cheaper and more environmentally friendly way to extract oil from heavy, dirty tar sands. Says Kent Croft, manager of the Croft Value Fund: "This is an exciting undiscovered story. The sands are being valued at cents per recoverable barrel, while previous transactions are about a 1.60. I think the stock is worth at least 70."

Canada's oil sands are notoriously difficult and expensive to extract oil from, being principally sand, water, and a dirty thick substance called bitumen. Heat this stew up, and you can get oil, plus some nasty byproducts. But Petrobank says that the problem is solved by its "toe-to-heel air injection" technology. Steam is injected into horizontal wells for two to three months to heat a heavy oil reservoir of bitumen. This eventually starts a combustion reaction that heats the reservoir to as high as 600 degrees Celsius, a temperature that partially upgrades the oil. (The technique is also called "fire-flooding.") The oil then flows to the surface, where it's treated and sent to market.

Petrobank maintains that the process produces 70% to 80% of the recoverable oil, versus 20% to 50% for other methods, while using much less water and natural gas.

Petrobank claims that its technology produces 50% lower greenhouse-gas emission than other methodologies do, because the partially upgraded oil requires less refining, and the project's surface footprint is much smaller.

Petrobank is using the technology to upgrade bitumen at its Kerrobert project in Saskatchewan and in Conklin, Alberta, where Encana (ECA) and Statoil (ASA) are developing projects. It also has licensed the technology to three other producers, including Shell (RDS-A).

Says Petrobank CEO John Wright: "What will push this along is the commercialization, which will accelerate in the next couple of years." Several state-owned producers are interested in licensing the technology. "We have confidentiality agreements with the Chinese, Venezuelans, Ecuadorians and Brazilians for agreements to apply our technology to oil and gas properties and we make a deal to share," Wright adds.

PETROBAKKEN HAS BEEN MAKING acquisitions in the Cardium oil formation in Alberta, where yields from already developed stakes may rise with the aid of technologies like Petrobank's. Still, some industry executives and analysts are skeptical about the toe-to-heel process.

In his assumptions about Petrobank, Raymond James analyst Justin Bouchard ascribes just a 25% probability that the technology works commercially—but his net asset value estimate is still 48.43, or 25.1% above the Thursday price.

Indeed, lingering questions about commercial applications are weighing on Petrobank shares, as well as a recent hullabaloo after a broken pipeline spilled thousands of barrels of oil from tar sands into Michigan waters in July. The EPA is reviewing the expansion of a pipeline bringing oil from the sands into the U.S. Oil prices that are stable or drifting lower make new technologies less compelling. And a convertible-share offering from Petrominerales, which diluted shareholders, didn't help.
The Bottom Line

Petrobank stock, which is listed in Toronto, has been changing hands below C$40. Bulls on the shares argue that they are worth as much as 75% more.

Sometime in the next year, assuming that overall stock prices perk up, Wright intends to spin out the Petrominerales and PetroBakken stakes, to focus on the value in Petrobank's remaining assets—technology and oil sands.

Those oil sands are in demand. This year, China's Sinopec bought ConocoPhillips (COP) 9% stake in the Syncrude oil sands project in Alberta for $4-billion-plus. And Total (TOT) agreed to buy Canada's UTS Energy for around $1.4 billion, to gain access to oil-sands assets.

Wright, who's obviously no clueless Jed Clampett, will bide his time. "If we saw solid markets, confidence returning to oil prices, that's around the time our stars would be aligning" to spin out the stakes, he says.

[dan_s]

My "Fair Value" estimate for PetroBank shares is over $81/share. Our Premium Members can see the calculation by going to the Sweet 16 tab on our website. Click on the PetroBank logo then click on their Net Income and Cash Flow Forecast.

In my opinion, PetroBank is close to a pure play on oil that is trading well below its break-up value.

Dan