Sunday, October 31, 2010

David Pescod - Worthwhile reading

Second Wave Petroleum -

I mentioned Keith Schaefer in a prior post.  His name pops up now and again when I dig around smaller Canadian E&Ps.  Here is a link to his newsletter website.  I found the interview below interesting as I have been looking at Second Wave casually for a few months.

My Favourite Junior Oil Stocks Exposed – the David Pescod Interview

This article is a transcript of an interview I did with Canaccord stockbroker David Pescod, one of the best stockpickers in the junior oilpatch I know. I started doing business with Dave in 1998, the middle of the “nuclear winter” of junior mining stocks, because I saw he was making good money in a bad market. I read his daily (and free) Late Edition newsletter every single day to hear what other analysts and executives are saying. He originally sent this article out in early August.

By David Pescod

Sometimes, timing is everything. But it certainly must have taken more than a little nerve to start an investment letter when it looked like the world was ending 18 months ago.

Keith Schaefer (who, like Scott Koyich) has played a big role in the investor relations business, should do quite well in this business where knowing everyone in the business counts…Keith is your basic social workaholic. It was time to catch up with Keith…

Dave: Keith, you’ve been writing your Oil and Gas Investments Bulletin for 18 months now. Your timing was great, as oil was $40 when you started. Now that oil seems to have found its level, where can investors make money?

Keith: You make money in the growth stories. And then you just watch the charts and buy them on a bad day, believing that the world is not ending – again.

Dave: Well, what growth stories do you like right now?

Keith: There’s a few of them. One of my favourites right now is Second Wave Petroleum, symbol SCS on the TSX-V It trades just under $3. They have an oil discovery at Judy Creek in central West Alberta, where they have over 100 sections of land in the Pekisko formation, and can drill 4 wells per section. They are steadily proving out the whole field, and they’re a great takeover candidate.

Dave: I own a bit but they’re a bit expensive, aren’t they?

Keith: Some growth is already factored into their share price, but that’s true with most good growth stories – especially the oily names. It means they have strong market backing. You want that in this kind of slow market. Most analysts figure the Pekisko field alone could be worth $7 a share to them. And they have recently been able to more than double production from their wells with a new fracking technology. That hasn’t been taken into account yet. And the big upside here is the deeper Beaverhill Lake formation.

Second Wave has almost 100 sections of it about 1000 metres underneath the Pekisko. This is the same formation that took Arcan from $1 – $5 per share this year. Arcan is getting 600 barrels per day of just light oil on some of their wells, just a few miles from Second Wave. Second Wave drills their first well into the Beaverhill Lake sometime in Q3.

If that well hits anything close to Arcan’s production rates, I think the stock is a huge win. If it misses, analysts say the Pekisko alone could take the stock to $7. And the controlling shareholder wants to sell the company, so in my mind a buyout is very, very likely.

Dave: What about an international play?

Keith: Coastal Energy, symbol CEN is my favourite right now. It is rocketing production from 10,000 barrels per day to possibly 18,000 barrels a day in just six months, and the stock actually has a lower valuation per flowing barrel than it did a year ago. I think I’ll be selling this stock for more than $10 a share.

Dave: Two oily picks. What do you see for the price of oil this Christmas?
Keith: Higher – probably $85 – $90 a barrel. Oil use in the US is on the rise, despite their tepid economy. China’s growth continues – that’s a social phenomenon now that politics nor economics can reverse. Those people want energy and consumption. And investors forget that natural oil declines means millions of barrels a day have to get replaced each year.

Munger and Buffett on Future Oil Prices

I don't think it is a mystery where they think oil is going.  Buying electric car companies, railroads that have their moat strengthened with high oil prices.......

Here is what they had to say at the 2008 annual meeting.

Thursday, October 28, 2010

Some hints from Penn West on the value of Petrobakken Cardium Assets

I've listened to the Penn West investor day presentation a couple of times now.  Both because I own Penn West (fingers crossed for a sell-off so I can buy more) and because they are starting to release details on what horizontal drilling is doing to the Cardium play of which Petrobakken is a major players.

Slide 31 in the link above shows the economics of a Cardium well according to Penn West.

While Slide 22 below shows the economics of a Cardium well according to Petrobakken.

So Penn West believe that each Cardium well is going to have an NPV of about $2.5mil.  Petrobakken (who cracked the drilling code in the Bakken) and use longer laterals think it is closer to $4.0mil.

Petrobakken has over 500 net locations in the Cardium.  At $2.5mil to $4.0mil per location there is some value in that land.

Six degrees of separation - Michael Dell, Brazilian Oil Fields, Universal Energy

50 cents at the start of the year, $4.17 today.

I bought at $2 and dumped recently.  Probably never should have bought in the first place.

Wednesday, October 27, 2010

West Coast Asset Management - On High Frequency Trading

Don't hear much from this guys anymore.  Still read their monthly letter though.

Keith Schaefer on Petrobank

Came across this article from April 2009 (with oil in the 40s and the world in a panic) written by Keith Schaefer who produces and energy investment newsletter.  I've spoken to him once and he knows the sector quite well.

Here is his website and the article below:

My newsletter presents in depth research on oil and gas companies in which I invest. I eat my own cooking (but not so much it would bias me). This is an example of the type of report I intend to produce for paying subscribers. Petrobank (PBEGF.PK) will likely be the largest company I ever cover; most energy companies will be between 2000-20,000 bopd. Please read below to discover why I chose Petrobank first.

Petrobank Energy is an oil producer I believe can deliver increasing growth in production and cash flow even during low oil prices.


It is one of the lowest cost operators, at roughly CAD$28/barrel. Low cost=high netbacks (profit per barrel of oil). These are the stocks with the best leverage to oil now.

These larger, intermediate producers will have the biggest moves FIRST for investors as the oil price and the world economy stabilizes.

PBG will be able to grow production in 2009 even in a low oil price environment.

It has three unrelated main fields, each of which have years of low risk development drill locations. Analysts and institutional investors like this diversification in geography.

Management has proven it is technologically innovative – by tweaking existing oil production methods, they have increased production in the field – their new extraction method for heavy oil and oil sands in particular holds huge promise, and is much more environmentally friendly than existing technology as well. This gives the stock a huge speculative appeal for such a large company.

PBG can be a long term hold or it can be a trader’s paradise as it is liquid and has 5%+ swings almost every day.


Debt. While it is “manageable” (the new buzzword in the industry), PBG has $331 million in Convertible Debentures (CD) and $315 million in regular debt. Only a select few companies get my attention with this amount of debt, but this is one of them. I will get into this debt issue more in the Capital Structure/Financial section.

The CD holders can convert their debt into stock at US$28/share – which is only about 11% dilution. But if the stock is below that when it comes due in 2012, PBG will have to finance at whatever price their shares are trading at - and if the market smells a financing, they will trade the stock lower.


Canada – Light oil, Saskatchewan

Colombia - Light oil production

Canada – Heavy oil production


PBG has grown production in this very profitable field from almost zero to over 22,000 bopd in just two years. PBG was one of the first companies to become large players in the Bakken, the most high profile new oil field in North America. It straddles the Dakotas in the US and Saskatchewan in Canada. It was the first large oil field that was opened up by horizontal drilling (HD). And it has one of the lowest costs of any field in North America.

PBG has more than 550 low risk, HD well locations in the Bakken still to drill. That’s after 161 wells drilled in 2008 with a 99.4% success rate. Large undeveloped land positions in ideal HD fields is a key to continued fast growth for any company in this market.

Quick History

Other companies had horizontally drilled Bakken but those wells had a lot of water. PBG had a different idea, using smaller Multi-Stage Fracs (MSF) that were more strategically placed in the Bakken reservoir, and not quite as forceful, so the frac did not go into adjacent zones, which is where the water was coming from. (Fracing is sending a special, custom fluid down into the well bore at high pressures out into the oil bearing rock – fracturing it, and allowing the oil to get to the well.)

This new strategy resulted in better production than they had hoped. PBG stayed quiet after their initial success and then went into the April 2007 land sale and bought a huge chunk of the whole play, giving them the critical mass to hugely quickly ramp up production through 2007 and 2008.


With lower oil prices, PBG now only has 2 rigs in the Bakken, compared to 10 last year, and in 2009 will probably drill only 40 wells if the oil price stays around US$40/barrel. Should oil move up to US$60, PBG says they could drill over 100 wells. They have lots of flexibility in their 2009 program.

Most analysts who cover PBG expect their production in the Bakken to stay constant during 2009; with only 40 wells - the new discoveries will only offset declines from current production and PBG will see no growth from the current 22,000 bopd.

PBG production from Bakken costs only CAD$28.41/barrel to produce. With oil at US$45 and the US$ worth CAD$1.20, oil is worth CAD$54.00, leaving PBG with CAD$27.50 profit per barrel – few companies can give shareholders that kind of profit at these oil prices.

PBG grew reserves by 95% to just under 60 million barrels. This is the asset that bankers lend against, and the asset just grew 95%. So even though PBG has debt of $315 million out of a possible $380 million line of credit, this increase means there is realistically no danger of the banker calling any part of the loan or reducing it or making covenants more restrictive.

They are continually improving upon their fracing methods to further increase production. Their innovation and competence in the science/art of fracing is what can make these oilfields so prolific for them and shareholders. They are using that HD ability in other fields, which we will mention briefly below.


Colombia will be the growth engine for the company in 2009. PBG’s Colombia operations are actually in a separate publicly traded company, Petrominerales, (PMG-TSX: $10.51, 100 M shares out). PBG owns 76.5% of PMG and has the same management. They have hit some very big wells, and have costs, at roughly CAD$25/barrel, $3.50 lower than even their Bakken play in Canada.

PMG operates in three fields in Colombia right now – the Llanos Basin in the eastern central area, where their prolific Corcel field is located, and in the Orita and Nieva fields in the southern part the country. February 2009 production was 25,897 bopd, an increase of some 40% over the 15000 bopd they were doing just in December 2008.

The team has discovered wells producing 9700 bopd for Corcel-D3, 8770 bopd for Corcel D1 in the Llanos Basin. For comparison, a well of 100 bopd in Canada is considered a success.

Quick History

CEO John Wright and CFO Corey Ruttan had worked for an oil company in nearby Ecuador, Pacalta, and were bought out by natural gas giant Encana. Wright and Ruttan went back to Encana and bought Pacalta’s Colombian assets. They steadily grew production through to 2004, when the Colombian government made new land available and Wright & Ruttan were able to get 2 million acres. The acreage in Colombia were in known but undeveloped basins. And they have had great success.


When you hit wells that big, you end up with very low costs per barrel – all in costs of roughly CAD$25/barrel. This will keep cash flow strong even if oil retreats to sub-$40. I expect costs to lower even more in 2009. The Corcel wells are 90% of their production and all that oil is trucked to pipelines right now. As they get infrastructure built to move that oil directly from the wellhead, costs could easily drop another $6/barrel.


The PBG team says that Colombia is the best jurisdiction for oil in the world, when you consider both its economic and geological potential. Royalties of 6-25% and taxes of 33% are roughly the same as you see in most western countries. Oil investment in the country is up dramatically in the last 5 years, and the state oil company Ecopetrol no longer has the ability to back in to any plays.

I spoke with Petrobank CFO Corey Ruttan about security and he says the country has improved dramatically. All their sites do have security, but he feels completely safe walking around the capital city Bogota.

Petrominerales has net cash of $50 million, but does have an $81 million convertible debenture due in December 2010 with an exercise or strike price of CAD$27.35. With their growth rate and high netbacks, management should have no problem, even if oil prices are low then, at raising equity to pay for it or rolling it over. They also have an $80 million revolving line of credit (the industry calls this a “revolver”) that is undrawn.

Corcel is the field of dreams for PBG/PMG. It’s a new field they discovered, with boomer wells, and a large undeveloped land position. At the Nievo and Ortia fields, PMG is doing work-overs and recompletions, essentially trying to get more production out of existing wells. That will steadily add to production but it’s Corcel that for the near term should be the big driver in increased production.

There is also some heavy oil potential for PBG’s proprietary technology in that field, which I will talk about next.

Ruttan would not say how much money PBG will spend in Colombia this year, but even in a year of tight credit, he expects them to spend more than the $50 million cash that PMG now has. He estimated they would drill at least 6 wells in the Corcel field this year. Any results that come close to previous wells can still have a big impact for PBG/PMG. Because of the potential for big wells, look for their capital expenditure (capex) be anywhere from $65 - $100 million depending on their confidence and oil prices.

PBG/PMG added over 10,000 bopd in Colombia in early 2009 – an increase of 30% for the company - and the stock did not move. I don’t think that has been fully priced into the stock.


This represents huge potential for Petrobank and its shareholders. It is increasingly common knowledge that Canada’s oil sands have huge reserves - as much or more than all of Saudi Arabia. But costs are higher in the oilsands. And the U.S. green lobby is against oil sands projects because of their need large amounts of water, natural gas and the carbon emissions generated in processing them.

The entire Bakken play is estimated to have maybe 4 billion barrels of reserves. Just one of PBG’s heavy oil plays could have reserves of more than 20 billion barrels.

And they have the worldwide rights to a new, proprietary technology that could lower costs and be a lot more environmentally friendly than current practises.

PBG has the THAI process. It operates much like horizontal drilling, with an added twist: At the far end of the HD hole, PBG drills another vertical well to meet it, and sends down oxygen to create a combustion – a fire – in the horizontal well. The fire moves along the HD well, heating up the cold oil sands and making them more viscous; the oil flows easier, lowering costs.

That’s the simple version. Less heat has to be used than conventional oil sands technology, such as SAGD (Steam Assisted Gravity Drainage) where two wells are sunk into the sands and heated. PBG also says their THAI process can retrieve 75-80% of the in-situ product, whether it is oilsands or just heavy oil, compared to 25-30% for everyone else.

They also project 50% less greenhouse gases, being able to use the natural gas produced in their system to power it all, use less water – it almost sounds too good to be true.

This is probably why analysts aren’t giving them much credit for it yet. PBG is moving ahead quickly on 3 properties – the Whitesands Project and May River in Alberta, and the Kerrobert project in Saskatchewan, a joint venture with True Energy Trust (TUI.UN-TSX: $0.80).

Ruttan told me the cost for a THAI well is $5 million, and from two wells they would hope to get 600 bopd of 13 degree API oil. (The API scale from 1-70 denotes how dense a petroleum liquid is – the higher number the better – the best Canadian light oil is about 41 API) Most oilsands product is 8-12 API. There is a discount (sometimes a big one) in world pricing for heavy oil; you don’t get WTI or Brent crude benchmark

So costs for the THAI process is much more similar to regular oil wells than conventional oilsands technologies, and THAI has the potential to increase the reserves from a reservoir 300-400%. The process is patented.

I think all the major oilsands players could consider buying PBG for the THAI process alone, should it prove out. At a minimum, analysts could give PBG a large upward re-valuation on a massive increase in reserves at its projects should THAI work.

The heavy oil part of the business, including THAI, is given very little value by analysts and investors basically get this for free.


PBG has purchased some large land tracts in the Horn River and Montney natural gas plays of North East British Columbia, and some oil plays in Peru, but none of those properties will see any significant spending this year and aren’t relevant to investors’ valuation of the stock at this time.


Shares Outstanding: 83.2 million

Fully Diluted: 99 million

Market Cap: $2.08 billion

Total Debt $0.646 million

Enterprise Value $2.726 billion (Market Cap + Debt)

Est. 2009 CF $502 M (US$45/b, 1:1.2 US-CAD$)

Est. 2009 Debt:CF 0.62

Est Debt:CF with CD 1.29

Est. Cash Flow Per Share $6.03

For my calculations I used $45 oil, a US$ worth $1.20 CAD, 50,000 bopd average production and a netback of $27.50.


There are two major convertible debentures:

US$250 million paying 3% and is convertible into 8.7 million common shares of Petrobank at US$28.49/share, due May 2012.

A US$81.7 million debenture is convertible into common shares of Petrominerales at US$27.35 per share, and that is due in December 2010. PMG actually repurchased $18.3-million of this CD at a 39-per-cent discount in 2008.

Banks lend against cash flow and/or reserves. PBG’s estimated $500 million cash flow (most analysts are actually in the $600 million range) is more than enough to cover interest and buy back enough principal to keep the bond holders happy. And their reserve growth was so impressive – more than doubling in 2008 – so bond holders will just be looking for conversion or an equity raise from PBG to pay them out.

The regular debt, or revolving debt for regular operations, was $315 million at year end 2008, and their debt ceiling is $380 million. So like most Canadian companies, they are close to their limit. (The attitude among almost all Calgary management teams is a bit striking for me – anybody not within 20% of their ceiling, i.e. leveraged 80% to capacity – feels like they have nothing to worry about.)

But again, even with lower commodity prices PBG has enough profit per barrel to pay interest and some principal. Most intermediate producers are now well over 2:1 debt to cash flow at US$45 oil, and the juniors are even worse at 3:1. PBG is 0.63:1 not counting the debentures, and 1.29:1 if you do include it.

Their PMG subsidiary has $50 million cash and its $80 million facility is undrawn. The PBG team is very well respected in the industry and I believe could always raise money to reduce debt, even in times of low oil prices.

PBG could sell some or all of their stake in PMG as well, netting them up to $1 billion at current prices – but don’t expect that. In other words, unlike many debt laden peers, they have lots of options.


The enterprise value of a company is market capitalization plus debt – and because all these energy companies have so much debt you need to include that in your valuation. PBG has an enterprise value of $2.7 billion, and estimated 2009 cash flow of $500 million – so at US$45 oil it trades at 5.4x cash flow to its enterprise value. (PBG’s enterprise value over debt adjusted cash flow is also 5.4x)

Canadian brokerage firm Canaccord Capital, has an average 5.7x multiple cash flow to enterprise value (using my US$45 oil and 1.2 US$-CAD$). Using a premium 6.1x multiple for PBG implies a target price of ($500 M cash flow x 6.1 multiple /83.2 M shares out =) $36.65 per share, and looking at its peer group, that’s the price target I will hold for my stock personally. I believe that’s a justifiable premium valuation for a company with this growth profile and low costs.

Another simple way to value a company is how much it is worth per flowing barrel. Talisman just sold their Bakken interests to two companies, TriStar Oil & Gas and Crescent Point Energy, for $70,000 per flowing barrel. For PBG, their 22,000 barrels would then be worth $1.54 billion, and not count their large undeveloped land position. In Colombia, a company called Hocol just sold some production to Ecopetrol for $44,000 per barrel – making their 25,000 barrels worth $1.139 billion – for a combination of $2.67 billion, or roughly the enterprise value of the company now. And investors get the upside of the heavy oil business for free.


Large, low cost producers like PBG have the most leverage to oil right now. Management is not just competent, but innovative. Their ability to frac HD wells better than most has proven invaluable to their growth. I see little potential for negative surprises. New Colombian wells have the potential to increase production 10-20% each, so that will likely be the catalyst for the shares to move higher. Later in the year, progress at their heavy oil project at Kerrobert in Saskatchewan with True Energy could also see analysts finally give the company and the stock credit for THAI.

However, in the face of an uncertain oil market and technical indicators in PBG’s stock chart and in the USO and XOM charts, I chose to be a patient buyer and will wait for a pullback on the stock into the $22 range (unless oil breaks out).

Eric Nuttall - Sprott Asset Management

Hi looks like he is about 12, but this guy is worth watching for ideas.  Knows Canadian Energy companies inside out.

Forget BP - ATP Will Benefit Most from Moratorium Lift

Saw this through Seeking Alpha.

Conversation with Sprott Asset Management Gold Bug

T2 Partners Quarterly Call

Always interesting.  Tongue and Tilson go through their portfolio and take Q&A.

Tuesday, October 26, 2010

Article on Baytex/Petrobank transaction

CALGARY - One of the joint venture partners who backed out of projects with Petrobank Energy and Resources to use its in situ combustion heavy oil recovery technology said Tuesday the parties couldn't agree on the pace of development.

Baytex Energy Ltd. indicated in a news release last week it would sell its 50 per cent share in a two-well-pair test facility in Kerrobert, Sask., and a proposed 10-well-pair commercial expansion but didn't explain why.

"It was nothing about Petrobank at all, it is more that they wanted to proceed to a full-field development and we would have preferred to have greater certainty about the results of the pilot maybe before we proceeded to that phase," said president and chief executive Tony Marino in an interview.

"So in a sense I think what it's reflecting is somewhat different business models of the companies. They're looking for a full-field presentation of the process and what we're after is low-risk, high capital efficiency."

Marino said Baytex has put about $5 million into the project, which it picked up with the purchase of assets of True Energy Trust.

He confirmed that his company is to receive $18 million from Petrobank, plus a gross overriding royalty of an undisclosed percentage on the project when production starts. It retains its 50 per cent share in the surrounding next phase lands.

Petrobank also announced last week that it bought out Shell Canada's 50 per cent stake in a similar proposed project called Dawson near Peace River.

That project, which also is to use the toe-to-heel air injection or THAI process, has yet to gain Alberta regulatory approval for the test wells.

Shell spokesman Phil Vircoe refused to give reasons for the sale or provide details other than to say the venture was not considered a core asset. Shell inherited the partnership when it bought Duvernay Oil.

"For us it was partly a resource capture," explained Chris Bloomer, Petrobank chief operating officer of heavy oil, on Tuesday, noting the company was able to book resources of more than 80 million barrels of heavy oil through the two deals.

In both cases, he added, the joint venture partner was less committed to the project than the original partner had been.

"Shell has their own technology thrusts and they're concerned about getting tainted by other companies' technologies so that was an issue," he said. "Big companies want to control things so we felt that wasn't going to work for us."

Petrobank said the net cost of buying out the two partners was $15 million - Shell is paying $3 million plus land to get out of its obligation to contribute $5 million to the Dawson test phase, Bloomer said.

In its release last week, Petrobank said it plans to spud its first expansion well at Kerrobert before month's end.

The THAI process encourages underground combustion of petroleum through the injection of air into a vertical well. An intersecting horizontal well then siphons off the resulting heated and softened oil.

Petrobank also has an owned THAI in situ oilsands pilot project south of Fort McMurray.

It said it will also proceed with a two-well project at Dawson as soon as regulatory approval is in hand and is targeting a minimum of 10 additional well-pairs as part of a near term expansion of the Dawson project.

Chinese Wanted a Bigger Piece of Penn West

I'm starting to wonder if I'm going to be guilty of sucking my thumb on PWE and not buying enough when I had the chance.  I was sitting and waiting for a big selloff when they cut the dividend.

I did some buying between $19 and $20 but it isn't a very large position as I was hoping for better prices.

Interesting story on how they had to talk China into a smaller investment.

Sunday, October 24, 2010

Mr. Graham missed half of Petrominerales production/reserves

I wonder if Mr. Graham knows that he has missed 100% of PMG's production and reserves in his valuation work ?  Candelilla which is PMG's largest producer was discovered in early 2010, and is not in the reserve reports.

Alan Knowles whose work I respect and learn from assigned $17 per share of value to the addition of these reserves.  Mr. Graham values them at zero because he is not aware of them.

In 2010 Petrominerales has hit 3 exploration wells on the Corcel block. The wells are known as Candelilla 1, 2 and 3. Together they have already doubled Petrominerales production from Q409.

Here is some detail on Candelilla from Alan Knowles.   His title is "Candelilla is game changer for PMG"

Saturday, October 23, 2010

Severe critique of my Petrobank Analysis - you be the judge

A nice gentleman named Mr. Graham that I don’t know was kind enough to write a very critical article of my analysis of Petrobank. He dedicated his analysis to David Einhorn seemingly suggesting he had managed some sort of legendary work of value investing. I had written a rather glowing article on the company and apparently my new friend did not think much of it.

I thought I’d give his analysis a review to see if I could learn anything. He certainly wrote in a tone that implied he could give me a few lessons. And any other analyst for that matter.

So I’ll go through his article point for point:

Petrobakken Valuation

His valuation of Petrobakken. This is one of the publicly traded subsidiaries of Petrobank.

His calculation of Petrobakken value was done using the proved and probable reserves PV10 figure of $3.65 billion. He then took the PV10 figure divided it by the number of shares outstanding to arrive at a figure of $14.21 per share.

As the share price is just under $23 today he concluded that the shares are considerably overvalued.

To that he added the following “I know some will point out that they have some other assets, such as land which is not included in this analysis, but those assets are usually insignificant and don’t provide any cash from operations. “

Just to recap. His valuation of Petrobakken consists of taking the PV10 value of the reserves that have been booked and then just assuming that all of the other assets that aren’t included in the PV10 figure don’t have any value because they are “Usually insignificant”. I’d say that his analysis of Petrobakken likely took about 10 minutes in total.

And I have to say….are you kidding me ? This guy is making me out to be some sort of a hack and his analysis involves not bothering to look at any other assets that aren’t in the PV10 figure because they are “usually insignicant”. Some serious value investing there Mr. Graham, why be bothered with looking, just assume instead.

Since Mr. Graham can’t be bothered to look at these “other assets” of Petrobakken let me save him some time. Because unlike Mr. Graham I actually do bother to research companies before I write articles. Here is what was missed.

1) Mr. Graham missed two thirds of their Bakken assets. The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date. Petrobakken has 1,050 drilling locations in the Bakken. The 2P number that you used is based on 348 wells drilled. That is 33% of their Bakken assets. The Bakken of course is a well known play, and these drilling locations are in the known to be in productive Bakken acreage. These are ultra low risk drilling locations. By ignoring them Mr. Graham is ignoring 67% of the value of Petrobakken’s Bakken properties.

Now maybe Mr. Graham is the only person who doesn’t think these other 700 or so drilling locations have any value. And if he does think that I can assure you he is the only one given the prices paid for undeveloped Bakken land over the past few years.

2) What about their Cardium assets ? Mr. Graham assigns zero value to the 120,000 undeveloped acres that Petrobakken holds in the Cardium. In fact he doesn’t even mention them. Don’t tell anyone, but I suspect it might be because he didn’t spend enough time researching to even know that these assets exist.

Let me get Mr. Graham up to speed. Petrobakken this year aggressively acquired land in the middle of what is turning into a highly productive Alberta Cardium play (listen to the recent PWE investor day) In fact Petrobakken is now the 3rd largest holder of Cardium acreage. In total they have 120,000 net acres and over 500 drilling locations. Petrobakken has zero dollars of reserves booked on these properties (because they are just starting drilling) so Mr. Graham has not given Petrobakken a dime of credit for these properties in his analysis.

3) Mr. Graham has also ignored two other significant plays that Petrobakken has. 350 conventional drilling locations in SouthEast Saskatchewan and another 400 in the Horn River play in British Columbia. By only looking at the PV10 of 2P reserves these assets have not been accounted for.

At this point I’m tempted to stop. Mr. Graham has missed the majority of Petrobakken’s asset value in his brief analysis. His analysis does not appear to have been performed by someone familiar with this industries and certainly no familiarity with companies such as Petrobakken or other Bakken holders like Crescent Point.

The value these companies created for shareholders was achieved when they got into the Bakken early, inexpensively and in a major way. Petrobakken appears to have added to this by doing the same in the Cardium. They have years and years of known drilling locations in these undeveloped acres. There is value in that there land boy, value.

Mr. Graham, those “other assets” that you can’t be bothered to analyze is where us value investors (and honestly anyone who follows the industry or reads the newspapers in Saskatchewan) knows hundreds of millions of dollars of asset lie.

Petrominerales Valuation

Good grief. This valuation effort is worse. Again Mr. Graham takes only the PV10 of the 2P reserves into his valuation work. He clearly has not done more than a cursory look into Petrominerales.

Here are the key points about Petrominerales

1) Petrominerales is an exploration company

2) The company has had four consecutive years of production growth

3) The company has 2.1 million acres of exploration potential in Columbia

4) The company has 5.2 million acres of exploration potential in Peru

5) The company has identified 75 high potential locations

Petrominerales is a very difficult company to value I will admit that. Four years ago the company had a PV10 of basically zero. As they have drilled out their high potential and enormous acreage they already have established a PV10 of $2bil. How well would have valuing this company solely on a PV10 basis 4 years ago have worked out ? Terribly of course, because the value is again in the huge landholdings of highly prospective property.

Again. Most of the value in Petrominerales is in those “other assets” that Mr. Graham can’t be bothered to look at because they “usually aren’t worth anything”.

I don’t know about you but I bet 7 million acres are worth something. And given that this company has grown production by 100% per year for four years running I have to think they have a pretty good idea where they should be drilling.

Below is a link to an analyst report on Petrominerales. The analyst in question is Alan Knowles of Haywood Securities. Mr. Graham scoffs at all analysts as being utterly useless. Mr. Knowles has a $42 price target on PMG vs $25 today and Mr. Graham’s valuation of $17. I’ve followed Mr. Knowles for a long time and think he is exceptionally good at what he does. Compare his report that values this company at $42 with the two sentences of work Mr. Graham put in.

Consider that Knowles has actually been to Columbia and Peru to understand the value of these assets. Consider that Knowles follows every transaction that happens in the areas where PBG/PMG/PBN work. Compare that to Mr. Graham who spent an hour looking up PV10 numbers. Who do you really think has valued this company more accurately ?

Here is Mr. Knowles report:

Heavy Oil Assets

Here is Mr. Graham’s detailed analysis

“3) Heavy oil assets. Here, they don’t have any proven producing reserves in the report, but simply NPV10-BT of $367 million for 2P reserves. I believe some of these are coming online as of this year. These assets are held at the parent company level and PBG has no debt. The fully diluted shares outstanding is 110.2 million.

The Net Asset Value can be computed to be:

NAV10 2P = ($367 million + 0) / 110.2 million = $3.33/share (These are wholly owned by PBG) “

That is it. 690 million barrels of oil (and that is at May River alone and excludes Kerrobert and . Mr. Graham figures the value is $367 million. Petrobank provides a PV10 estimate of these assets in their presentation of about $3.3 billion.

But since they don’t have a specific development plan filed and thus no P2 reserves, Mr. Graham figures they are basically worthless. Again I think most value investors would not blindly follow specific PV10 figure, but apply common sense to determine that 690 million barrels of oil have value.

Whitesands alone is expected to produce 100,000 barrels a day for 30 years once developed. You can’t see that in any financial statements. You have to spend more than 5 minutes to fully understand the value of a company’s assets.

THAI Technology

Here is Mr. Graham on THAI. Since he seemingly heard of the company this week through my article I’m amazed he can get his head around this complicated technology so quickly.

“4) THAI technology. This is interesting because Baytex and Shell Canada just sold their respective shares in the project to Petrobank. Since they are partners they know exactly how well the THAI process is performing. Why did they just sell? I would guess the results aren’t coming on as expected and both partners wanted out. It was interesting that Baytex didn’t even discuss in there last report. Ascribing a value is very difficult so I will give it a value of zero. “

This might be the most absurd part of Mr. Graham’s condescending criticism of my report. He says that because Shell and Baytex who are Petrobank’s partners on THAI are selling these assets back to Petrobank, that THAI must not have any value.

Mr. Graham.

1) Neither Shell or Baytex have ANY interest in THAI. None. They were both partners in the production from the two properties that THAI is being tested on. So they would share in future production from these properties, they don’t share in the value of THAI. It is Petrobank that retains full 100% interest in THAI to roll out to other users.

2) Neither Shell or Baytex were the original partners on these properties. They acquired them when they acquired the original partners in other transactions. For Shell in particular the production that will come from Dawson is of no significance to them. They just got rid of something they never had any interest in.

3) Baytex is still a partner on the Kerrobert production. They are now a partner in the form of an override on production instead of a partner who has to come up with the up front capital to develop the property.

These transactions tell you nothing about THAI. The other parties only interest was in their share of production, and remember the property that Shell gave up can also be developed (less efficiently) using other technologies so they aren’t interested in it period. It is the property that the transactions involved not THAI.

Mr. Graham’s Summary

“Myself, as a value investor, I prefer to buy with a margin of safety. This investment clearly doesn’t offer and room for error on the reserves or the price of the commodities. Clearly a lot of arm waving is required to believe that these shares provide a margin of safety. Analyst reports are not worth the value of the paper they are printed on. Commit them to the fire. “

These seem like the words of a young overconfident investor. Have a look at the very simplistic analysis that Mr. Graham did on Petrobank which:

1) Ignores 75% or more of Petrobakken’s asset value by not considering undeveloped acreage

2) Ignores all of Petrominerales’ multi-million acre portfolio of highly prospective properties

3) Assigns no value to almost 700 million BOE of heavy oil assets because reserves have yet to be booked

4) Gets the facts of a recent material transaction completely wrong (suggesting Shell and Baytex had some sort of interest in THAI)

…and then compare it to the analysis of someone like Alan Knowles who has studied this company for years, has visited their properties in South America, Saskatchewan and Alberta and is familiar with every other company in Canada in this industry.

Mr. Knowles has a target of $75 for Petrobank. Mr. Graham who has spent a couple of hours on the company thinks it is worth less than $40.

I know which analysis of the two I would commit to fire. And it wouldn’t be the one from the guy with industry wide reputation as a top notch analyst.

But don’t take my word for it. Google Alan Knowles and read his research and see what you think. It is better than anything I can do.

Friday, October 22, 2010

Chevron building a $7.5bil floating Deepwater city

We have come a long way since the BP spill made it look like the GOM was dead only a few months ago.

Thursday, October 21, 2010

Understanding future spin-off of PBN and PMG

John Wright Petrobank CEO has indicated that the two subs will be spun out to shareholders in the future.

Some details on the mechanics and implications of spin-offs.

Spin-Offs and Split-Offs


In a spin-off, the parent company (ParentCo) distributes to its existing shareholders new shares in a subsidiary, thereby creating a separate legal entity with its own management team and board of directors. The distribution is conducted pro-rata, such that each existing shareholder receives stock of the subsidiary in proportion to the amount of parent company stock already held. No cash changes hands, and the shareholders of the original parent company become the shareholders of the newly spun company (SpinCo).

Strategic Rationale

Divesting a subsidiary can achieve a variety of strategic objectives, such as:

Unlocking hidden value – Establish a public market valuation for undervalued assets and create a pure-play entity that is transparent and easier to value

Undiversification – Divest non-core businesses and sharpen strategic focus when direct sale to a strategic or financial buyer is either not compelling or not possible

Institutional sponsorship – Promote equity research coverage and ownership by sophisticated institutional investors, either of which tend to validate SpinCo as a standalone business

Public currency – Create a public currency for acquisitions and stock-based compensation programs

Motivating management – Improve performance by better aligning management incentives with SpinCo's performance (using SpinCo, rather than ParentCo, stock-based awards), creating direct accountability to public shareholders, and increasing transparency into management performance

Eliminating dissynergies – Reduce bureaucracy and give SpinCo management complete autonomy

Anti-trust – Break up a business in response to anti-trust concerns

Corporate defense – Divest "crown jewel" assets to make a hostile takeover of ParentCo less attractive

Transaction Structure

In general, there are four ways to execute a spin-off:

Regular spin-off – Completed all at once in a 100% distribution to shareholders

Majority spin-off – Parent retains a minority interest (< 20%) in SpinCo and distributes the majority of the SpinCo stock to shareholders

Equity carve out (IPO) / spin-off – Implemented as a second step following an earlier equity carve-out of less than 20% of the voting control of the subsidiary

Reverse Morris Trust – Implemented as a first step immediately preceding a Reverse Morris Trust transaction

ParentCo's existing credit agreements may impose restrictions on divestitures that are material in nature. It is important to determine if any credit terms will be violated if ParentCo spins off a subsidiary that materially contributes to its business.

Tax Implications

A spin-off is usually tax-free under Internal Revenue Code (IRC) Section 355, meaning that no taxable gain is recognized by either the parent entity or the parent's existing shareholders. To qualify for favorable tax treatment, the spin-off must meet the requirements of Section 355:

The parent and subsidiary must both have been engaged in an "active trade or business" the entire 5 years preceding the spin-off, and neither entity may have been acquired during that period in a taxable transaction.

ParentCo and SpinCo must continue in an active trade or business following separation.

ParentCo must have tax control before the spin-off, defined as ownership of at least 80% of the vote and value of all classes of subsidiary stock.

ParentCo must relinquish tax control as a result of the spin-off (< 80% vote and value).

The spin-off must have a valid business purpose, and cannot be used as a "device" to distribute earnings (dividends).

The parent's shareholders, collectively, must retain continuity of interest in both parent and subsidiary for a 4-year period beginning 2 years before the spin-off by maintaining 50% equity ownership interest in both companies (a change in control of either ParentCo or SpinCo during this period could trigger a tax liability for the ParentCo). This is the anti-Morris Trust rule.

If the unusual event that a spin-off does not qualify for tax-free treatment, there are two levels of tax:

Ordinary income at the shareholder level equal to the FMV of subsidiary stock received (similar to a dividend) and

Capital gain on the sale of stock at the parent entity level equal to the FMV of subsidiary stock distributed less the parent's inside basis in that stock.

Any cash received by shareholders in lieu of fractional shares of SpinCo is generally taxable to shareholders.

Wednesday, October 20, 2010

Petrobank Energy - An Exceptional Risk/Reward Scenario

I wrote this for gurufocus.  Hopefully I can attract information from knowledgeable sources.

Calgary Herald on Petrobank Kerrobert/Dawson Deal

The most important part of the article being at the very bottom which quotes Knowles on production from Kerrobert having good results over the summer

Calgary-based Petrobank Energy and Resources is buying out its partners in two joint ventures that are to use its innovative fireflood heavy oil recovery technology.

In a news release Tuesday, the oil and gas company that has been championing the toe-to-heel air injection or THAI recovery method said it is buying out partners Shell Canada and Baytex Energy Ltd. for a net $15 million in cash.

Neither Shell nor Baytex was the original partner in the THAI development deals, in which Petrobank provided the technology in return for land and resources.

Duvernay Oil signed on as 50 per cent partner on the Dawson project near Peace River, Alta., before it was sold to Shell and True Energy Trust was the first partner in the Kerrobert, Sask., project before the asset was sold in a package to Baytex.

“These acquisitions effectively consolidate and increase our Canadian heavy oil lands and add a combined additional 41 million barrels of conventional heavy exploitable oil-in-place at Dawson and Kerrobert as estimated by McDaniel & Associates Consultants Ltd. at Dec. 31, 2009,” Petrobank said in the release.

“We have now established full development discretion on all our domestic projects.”

Petrobank shares fell 41 cents to $39.59 on the Toronto Stock Exchange on Tuesday.

In a separate release, Baytex confirmed the sale of its 50 per cent interest in the project at Kerrobert but said it will receive $18 million cash and a gross overriding royalty on its interest in the lands, the latter to begin one year after first production.

“The disposed assets include approximately 1,300 net acres (520 hectares) of land as well as Baytex’s interest in the two-well pilot project that utilizes Petrobank’s THAI technology,” it stated.

No representatives of any of the three companies was immediately available to comment.

Petrobank said it plans to spud its first expansion well at Kerrobert before month’s end. The expansion, approved in August, includes a further 10 THAI well pairs and surface facilities.

The startup preheat ignition cycle is targeted for early in 2011 and production in the second quarter.

The THAI process encourages underground combustion of petroleum through the injection of air into a vertical well. An intersecting horizontal well then siphons off the resulting heated and softened oil.

Petrobank also has an owned THAI in situ oilsands pilot project south of Fort McMurray called Whitesands.

It said it will also proceed with a two-well project at Dawson as soon as regulatory approval is in hand and is targeting a minimum of 10 additional well-pairs as part of a near term expansion of the Dawson project.

Petrobank chief executive John Wright has complained in the past that the regulatory process in Alberta takes too long compared with Saskatchewan.

Analyst Al Knowles of Haywood Securities said he views the news as a positive for Petrobank.

“They’ve acquired their partners’ interest in these two THAI projects ... they like to have high working interests on most of the things they do,” he said.

He said the Kerrobert pilot developed good results over the summer and bodes well for production from the expansion.

“It’s 10 wells and each well is expected to do 600 barrels per day,” Knowles said. “So 100 per cent of 12 wells including the pilot .. is a pretty good start for them.”

Tuesday, October 19, 2010

Ben Stein visits with Warren Buffett

The first thing I notice on my most recent visit with Warren E. Buffett, who recently turned 80, is how incredible he looks. He would look terrific for 50; for 80, he looks like Charles Atlas. He's modest about it, as he is about everything. "It all works great," he says. "The eyes, the hearing -- everything works great ... which it will until it all falls apart."

The second thing you notice is that he is so smart it curls your hair.

My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?"

"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

"Equities," Buffett answers without a moment's hesitation.

"The VTI?" I ask.

"That's good enough. Maybe a selection of high-dividend-paying stocks that are likely to raise their dividends. Maybe the top 100 dividend payers of the S&P 500."

Then, after a second's thought, he adds, "Well, maybe not that, but equities."

On the $64,000 question -- whether the recovery was real -- Buffett has no doubt. "Yes," he says, "it's a recovery. It's a slow recovery, but it's a recovery. We're calling back some people at Burlington Northern. We are still letting a few go in other businesses, but we see a pickup in business of heavy users of American Express, in freight car loadings at BNSF -- across our businesses, we see slow recovery."

"When would you start hiring a lot more people?" I ask him.

"When demand picks up," he says. "We don't hire because we get a tax break or because someone in the government tells us to. We hire when there's more demand for what we are making or moving or selling. It's that simple."

"Where will the demand come from if a business as big as yours is being so cautious?" I ask.

"It's already coming," he says. "It's already happening, and it will pick up. Look," he adds, "we needed a really big stimulus in the fall of 2008 -- a really, really big stimulus. We didn't get it. It was a miracle that Bank of America bought Merrill for $29 when it was probably worth 29 cents if left on its own for a few days. If that hadn't happened, everything would have collapsed. The whole commercial-paper market would have stopped. Every domino would have fallen. Berkshire would have been the last, but it would have fallen too. Ken Lewis saved the whole system for a while, until TARP could rescue it. But now we're just going to get a very slow recovery because people are still scared. But we are seeing recovery, definitely."

"How about in housing?"

"That recovery is still a long way off. That market got way out of equilibrium, and it's going to take a long while for it to get fixed."

Buffett goes into his life and childhood, but I don't see how we can make any money out of that, so I will leave that part out.

What about taxes? Buffett thinks that taxes should be raised on really rich Americans -- ones making $5 million a year, say, and especially ones making $1 billion a year.

"Why would we want to do that" I ask, "if we have a fiscal policy that is explicitly about running large deficits?"

The three of us -- Buffett, my colleague Phil deMuth,and I -- talked for a long time about the size of the deficits relative to "normal peacetime" and World War II, when they were far higher than they are even now. Then Buffett sums up his feelings about it, saying his wish to raise taxes on the very rich is really about social justice more than about fiscal policy.

"I would give anyone an exemption from the higher rates if he had a son or grandson in Afghanistan," he said. "I meet a lot of people at these conferences of rich people, of billionaires," he said. "None of them have anyone in their family in combat."

We talk awhile longer, and then Phil and Warren and I go out for a memorable Italian meal at Piccolo Pete's, which Warren considers the best restaurant in America. I look at him as he chews his meatballs. (He has perfect table manners.)

"This guy is so smart -- it's like he's a machine, but a very friendly, polite, affable machine," I think.

I keep thinking of what I would do if I had even the tiniest fraction of his money. But I never will, so I'll skip that too.

Buffett drives us back to the hotel in his lovely Cadillac. "I bought it because a couple of years ago I saw Congress giving Rick Wagoner (the former CEO of GM) such a going-over that I thought I should help him out by buying a Cadillac."

"Cadillac," I think, remembering an old Bob Dylan song. "Good car to drive, after a war."

Ben Stein is an economist, actor, lawyer, writer and quiz show host from 1988 to 1996 was a professor of law and economics at Pepperdine University School of Law.

Petrobakken continues repurchasing shares

Slowly but surely.  Consistently buying.  So nice to have an investment in a compay with excess cash flow !

PetroBakken Energy Ltd. (PBN)

Oct 15/10 Oct 15/10 PetroBakken Energy Ltd. Direct Ownership Common Shares Redemption, retraction, cancellation, repurchase 50,000 $21.960

Oct 15/10 Oct 14/10 PetroBakken Energy Ltd. Direct Ownership Common Shares Redemption, retraction, cancellation, repurchase 17,900 $22.162

Oct 15/10 Oct 13/10 PetroBakken Energy Ltd. Direct Ownership Common Shares Redemption, retraction, cancellation, repurchase 8,900 $22.079

Oct 15/10 Oct 12/10 PetroBakken Energy Ltd. Direct Ownership Common Shares Redemption, retraction, cancellation, repurchase 18,300 $21.803

Petrobank Consolidates Heavy Oil Assets

Interesting.  Need to read through again.

Petrobank Energy and Resources Ltd. is pleased to announce that we have concluded the acquisition of Baytex Energy Ltd.’s and Shell Canada Ltd.’s respective 50% interests in the Kerrobert and Dawson projects. The total net cash paid for these transactions is approximately $15 million, before closing adjustments. These acquisitions effectively consolidate and increase our Canadian heavy oil lands and add a combined additional 41 MMbbls of conventional heavy Exploitable Oil-in-Place at Dawson and Kerrobert as estimated by McDaniel & Associates Consultants Ltd. at December 31, 2009. We have now established full development discretion on all our domestic projects.

Sunday, October 17, 2010

Paulson Protege Pellegrini

Another smart guy bullish on oil/resources.  Avoid bonds.

CTM Media - From Above Average Odds Investing

From a blog I've read for a while another idea to dig into (posted here so I don't forget)

This is at least the 2nd idea I've liked from Above Average Odds.  First one being Yukon Nevada Gold (I put in an order to purchase but shares ran away from me)

"For those unfamiliar, we think CTMMB is an attractive (read dirt cheap) micro-cap spin-off, with an interesting/misleading past, as well as some very favorable underlying dynamics that the market is not currently recognizing/giving the company credit for. Adam’s take is that CTMMB will eventually garner a much better multiple on much higher profits at some point down the road – as management continues to re-engineer/reconfigure the company’s portfolio of businesses in a manner that will likely continue to create significant shareholder value. We agree.

Anyhow, below is an updated version of Adam’s mid-January thesis of CTM Media. Enjoy!


Original Write-up date: 1/19/10

CTM Media is a very interesting business with a very interesting story and a even more interesting chairman. CTM Media was spun out of IDT in July 09. For those of you familiar, IDT was the company that invented Net2Phone and basically was the undoing for long distance telecom providers. With the advent and proliferation of free long distance on cellular, VOIP, and competitive triple play offering from Cable providers, IDT began to diversify out of its core businesses — telecom which was dying and publishing/media a stalwart provider but with little “perceived” growth. The engimatic chairman who build this company from scratch has suffered from severe bouts of depression and unfortunately took a sabbatical from the company and went to study torah in Israel when IDT needed help the most. Fortunately, Howard came back to the states and reality and stepped back into the role of right sizing IDT. Unfortunately, Howard came back when the world was falling apart — Sept. ’08. If we fast forward to today, Howard has succesffully cut costs and is running an asset rich business (Real estate holdings, telecom biz which is worth something to someone, and this utility business that is doing unusually well, and the co. itself is profitable and trading below EV). There are alot of moving parts in the IDT business and value at first glance is not clear. What is clear is that Howard Jonas — CEO/Chairman is focused on bringing all his companies back to profitability and building shareholder value — namely for himself.

It is unclear why Howard decided to spin-off CTM Media to its shareholders given that its a profitable and stalwart franchise. My only guess is that b/c IDT is comprised of so many disparate parts, the market would never put the multiple it deserved on this business and its profitability would be masked by IDT’s struggling telecom biz.

In my mind, CTM is a once in a lifetime opportunity and those who were fortunate enough to get this business at .70 post-spinoff will be the source of my envy for a great while. The Company’s core business is very simple to understand. It’s CTM business stands for creative theatre marketing. Those of you familiar with NYC might recognize the brochure stands that exist at public locations throughout NYC — statue of liberty, ellis island, empire state bldg, penn station, and various hotels. CTM not only has the rights to place these stands — colloquially know in the biz as “CTM’s” but publishes the brochures for the relevant purveyors of survices — largely theatre companies and other tourist attractions. My channel checks with various people in the theatre/hospitality business tell me that they have a great reputation and are a critical part of their marketing efforts. I have been told that pricing increases 3-4pct a year and requires almost no capex — great for a PE type buyer or a roll up for a WPP, Omnicom, etc. On a nomralized basis I think this busness can do about 4mm of EBITDA a year — that alone should signal a real deal.

It’s other businesses include IDW and a radio station that they are in the process of selling. MY PF EBITDA calculation takes into account the radio station running at breakeven though my EV calculation does not include the $4mm potential of cash/promissory note that might come from the sale of its WMET radio station. I purely assume they can give it away and increase EBITDA by its run-rate loss (very conservative in my opinion and valuation changes dramatically if radio station deal goes through at $4mm). IDW on the other hand could be a source of real value. The company is a publisher of sorts specializing in comic books/graphic novels and recently childrens books. Those of you familiar with sci-fi/fantasy, IDW published comic books/graphic novels for 30 days of nite, GI JOE, Transformers, Star Trek, and many more. The company has been working feverishly on distributing these titles on Ipod, Iphone, Itunes, PSP, etc. and have been told that will be incrementally high margin. IDW is also responsible for the children’s publishing arm that Howard Jonas purchased while at IDT that I am told is relatively stable and could provided future avenues for growth. In 2008, the Company did almost 1.8mm in EBITDA which was unusually high but was a byproduct of many major movies coming out — GI JOE, Transformers, etc. It was fortunate b/c it offset some losses the CTM business was experiencing from some of their customers going out of business during the great recession. Fortunately, the CTM business has shown signs of life and carrying its weight with IDW doing about half of what it did last year which was a breakout year for them. After many talks with Ted Adams, founder of IDW, I am confident and he is as well that they will continue to methodically grow this business. My valuation does not take this into account as I assume about a 1mm EBITDA less the 23 pct non-controlling interest of this business segment (in all likelhood mgmt. will buy this out at some point) which is a run-rate of last qtr. (very conservative) and could significantly outperform my expectations. Again, this is a low capex business which great brands and operators who are focused on quality over quantity. Those familiar with comic books know that IDW is a close 3rd to Marvel and DC.

If you assume my PF numbers which are very conservative and do not take into account proceeds from the sale of the radio station, the company is trading at 1x EBITDA and 1.56x EPS (net of cash). The valuation is significantly better if the sale goes thru. FYI, Company was also able to sneak 1mmm shares through a tender offer at 1.10 and my math takes into account PF share count and cash used to repurchase. Mind you at 1.10 the company was repurchasing shares below cash– unbelievable.

My 4.00 PT assumes a 4.63x EBITDA for a business that is stable with significant opportunity for growth on the IDW side — stil very cheap. If we assume the company gets some $$ from the radio station, the valuation only improves. Realistically, I believe this company is worth north of five dollars to either a strategic or we get significant growth on the IDW side.

The company trades on the pinksheets under,, and — doesnt trade and is supervoting owned by Howard Jonas.

Also interesting to note that CTM’s second largest shareholder after HJ is William Martin of Raging Capital Management. William Martin was notoriously bearish on IDT when Howard left the company in arrears but suddenly got bullish when Howard came back to right size the ship. Martin received his CTM shares through the spinoff from IDT and has continued to buy — recent fliing shows him buying at 1.50+ where CTM represents a significant portion of his portfolio. Not to mention, this was a guy who was very wary of what HJ is capable of — shale oil and all the other nonsense IDT got involved in. It seems as if the p/value balance more than compensated for Martin’s HJ fears and it seems that HJ is continuing to do right by his shareholders and has drawn increased attention from people who initally doubted him, namely myself and Bil Martin.

Variant View

With only 1 qtr of published results as a standalone business I think the market doesn’t trust the strength and longevity of CTM’s two great core assets. I think the downside is that Howard Jonas spends your cash on value destroying business which is what happened to some degree at IDT. Fortunately, HJ is showing no signs of destroying shareholder value but realistically trying to create value for shareholders ( he is the largest shareholder and holds shares for his wife and children too in a irrevocable trust). The tender offer and the potential sale of the radio station give me some comfort that Howard is steering this ship right. Also, Howard has significant experience in the publishing business as it was his first business he started out of college — he is not operating a business outside of his core competency for now which is an additional source of comfort for me.

UPDATE 2-26-10

Radio station sale is going through and run rate earnings profile improves. Company approved special dividend of .25 and HJ mentioned they have no intent to keep unnecessary capital or invfest in value destroying ideas. Looks like Howard is looking for redemption for his follies at IDT and hes taking people by storm with CTM. Stay tuned….


If you include seller note for radio station the company is trading at 1x EBITDA again. When I spoke to Howard Jonas last he made a smug comment: “how did you get so much… I wish I owned more..” Read into it however you want. The Chairman likes the stock…he tried to tender for a 1/3 of the company last oct/nov. Do not be surprised if the valuation stays low like this if he tries to do it again. In the event that the stock trades up, perhaps he will do another special dividend. For those of you following the IDT story, Howard has breathed life back into that monolith and his paying himself a very nominal salary. FWIW, I think CTM’s divs is Howard’s key to paying for all the weddings of his twelve children. Not to mention, the Company has 48mm worth of NOLS — so it will not be a tax-payer for a long while. So the way I see it you got 5mm of untaxed CF next year for a 4-5m EV and the cash will get returned to you. Seems pretty good, right?"

Saturday, October 16, 2010

From VIC - for further research

Posting here so I don't forget to spend more time.....

Retail Holdings N.V. (RHDGF) is a retail holding company that arose from the 2000 bankruptcy and liquidation of The Singer Company, a firm in business for almost 160 years which is likely most familiar for its prior role as a sewing machine manufacturer and distributor to the garment industry, but which also founded an extensive network of durable consumer goods retail and manufacturing firms with operations in multiple nations across South and Southeast Asia. First posted by perspicar in 2007, RHDGF still trades at $8, but is now experiencing several catalysts including an earnings turnaround, expanding market value of its public subsidiaries, and a recent asset sale unlocking significant cash, each pointing to significant upside from current levels.

RHDGF's primary assets consist of a majority stake in Singer Asia (which in turn owns controlling stakes in multiple publicly-traded South Asian durable consumer goods retail and manufacturing subsidiaries further detailed below), in addition to direct ownership of $25.2 million in 11% notes issued by a KKR affiliate during a 2004 sale of the Singer sewing machine manufacturing operations and trademark, and additional free cash at the holding company level.

The most significant asset is RHDGF's 56.5% ownership of Singer Asia, a holding company with an aggregate $256 million in revenue which owns majority stakes in publicly-traded subsidiaries in Pakistan, Bangladesh, Thailand, India, and Sri Lanka. Through these entities, Singer operates the single largest retailers of durable consumer and electronic products in both Pakistan and Bangladesh, and is particularly dominant in Sri Lanka, where it holds from 37% to 80% market share nationwide in multiple product categories including televisions, refrigerators, and washing machines. In areas where tariffs or logistics act as barriers to global sourcing, Singer Asia also owns capacity to manufacture or assemble various consumer goods locally, including controlling stakes in two Sri Lanka-based durable goods manufacturing firms, Singer Industries and Regnis PLC. Singer Thailand is the largest direct (door-to-door) retailer of durable consumer goods in that country, and has again become profitable after measures to tighten lending policies at its consumer credit arm. After acquiring additional equity during a 2008 restructuring, Singer now owns a 85.9% stake in Singer India; which now operates principally as a wholesale distributor to the garment industry, but also owns a network of 17 retail stores in major urban centers and is one of only two multinationals with the legal right to operate a nationwide retail operation in India.

In 2003 a 43.2% minority position in Singer Asia was sold to an unrelated private investment fund for $30 million in cash, which was used to buy back stock and discharge debt and warrants arising from the 2000 Singer bankruptcy exit. This 2003 transaction would value RHDGF's current stake at $39.4 million, which together with the $25 million in notes receivable far exceeds the current $42 million market cap, a reassuring margin of safety using a conservative baseline estimate of private market value. However, after years of successful restructuring, organic revenue growth, and cost controls, Singer Asia has begun to generate significant growth in earnings (magnified by heavy stock buybacks at RHDGF), now making RHDGF deeply undervalued based both on current net income and on a sum-of-the-parts market valuation of its publicly-traded assets.

Earnings Power

Considered purely as a going concern, Retail Holdings appears increasingly attractive, with earnings from continuing operations reaching $0.80 per share for the last six-month period. CEO Stephen Goodman has historically been very conservative and non-promotional in his communications, but in 2010 midyear comments released earlier this month sounded a much more positive tone, noting a substantial increase in revenue and progress in cost controls, and forecasting net income in excess of $37.0 million for the current fiscal year, equivalent to earnings per share of more than $3.25. Backing out a $1.76 one-time boost to net income expected to occur in the current fiscal quarter on the recently concluded ILFS sale further detailed below, this would still represent annual run-rate operating earnings of $1.84 per RHDGF share, for a forward P/E of just 4.35.

Subsidiary Market Value

Singer has already begun to gradually monetize its equity positions in publicly-traded subsidiaries as market conditions become favorable, distributing cash to RHDGF shareholders in the form of special dividends and aggressive stock buybacks. During 2009, Singer Asia successfully sold further 5% stakes in Singer Bangladesh and Singer Thailand to the public, and also sold 100% of its unprofitable former Phillipines subsidiary. In July 2010 (subsequent to the close of the last reported earnings period), Singer Bangladesh sold its remaining position in a publicly traded consumer finance firm, International Leasing and Financial Services (ILFS), resulting in a boost to net income of $1.76 per RHDGF share for the coming quarter and a net inflow of $31.9 million in cash to the RHDGF balance sheet. This cash infusion alone represents nearly three fourths of the current market cap of the entire parent company, though much of this will have likely not yet passed through to the holding company level.

From figures in the latest annual report as of year-end 2009 (not far off 5-year lows for emerging market equities), Singer Asia's publicly-traded holdings had a combined market value of $128.6 million, of which RHDGF's 56.5% stake represents $72.7 million, equivalent to $13.87 per RHDGF share before assigning any value to the additional notes receivable and holding company cash. With a subsequent rebound from depressed levels of 2009, the current market value of Singer shares substantially exceeds even this figure. For example, Singer Bangladesh has now nearly tripled in market value since RHDGF's last annual report at year-end 2009, likely due to in part to the positive impact of its recent $32 million sale of ILFC. Singer Sri Lanka has also more than doubled in value with development returning to the island nation after 2009 brought a decisive end to its decades-long civil war, positioning Singer to benefit from its near-monopoly market share in many areas.

To gain further clarity on the discount to market value given management's ongoing monetization of assets, I reviewed the current market capitalizations of principal Singer subsidiaries as reported on websites of the respective national stock exchanges. Below is a table of recent market caps converted to US dollars at current exchange rates and adjusted for Singer Asia's percentage equity stake in each subsidiary. (These are quick back-of-the-envelope calculations as of 8/22/10 based on the data I found, and I'd welcome corrections from anyone with more information.)

Singer Pakistan Ltd 610,639,114 rupees PKR = $7.14MM * 0.703 Singer Asia equity stake = $5.01MM USD

Singer Sri Lanka PLC 12,445,835,264 rupees LKR = $110.7MM * 0.875 equity = $96.86MM USD

Singer Thailand PLC 864 million baht THB = $27.38MM * 0.485 equity = $13.27MM USD

Singer India 33 crore rupees = 330 million rupees INR = $7.09MM * 0.859 equity = $6.09MM USD

Singer Bangladesh Ltd 15051 million BDT = $218MM * 0.75 equity = $163.5MM USD

$284.73MM * 0.56516 RHDGF stake in Singer Asia = $160.92MM

Divided across 5.24 million shares outstanding, current market value of Retail Holdings' stakes in its major publicly traded subsidiaries would come to $30.71 per RHDGF share, again before considering the additional value of notes receivable and cash at the holding company level. In business for well over a century and continuing to own a variety of wide-ranging retail, manufacturing and credit operations across South and Southeast Asia, the Singer portfolio of companies may contain further assets with additional hidden value to be unlocked over the course of an orderly liquidation, with one case in point being the recent windfall from sale of shares in ILFC.

KSIN Notes

At the holding company level, RHDGF also directly owns $25.2MM in 11% notes payable by KSIN, a private equity vehicle formed by Kohlberg Kravis Roberts to buy out the Singer sewing machine manufacturing operations and trademark in 2004. KSIN had let the notes slip into default during the credit crisis in 2009, but in May of this year fully cured the default by bringing payments current, and agreed to a rise in interest rate from 10% to 11% in exchange for extending note maturity to September of 2011. Given the attractiveness of Singer Asia these notes can simply be viewed as an added call option; but as credit conditions continue to stabilize, if KSIN is able to refinance and cash out the remaining principal at maturity next year, RHDGF shareholders would benefit from an immediate $4.81 per share cash infusion, likely stimulating another substantial special dividend that would dramatically reduce the cost basis of any investment made near current prices.

Net Cash Position

Although some debt is incurred by the retail subsidiaries for working capital purposes and is reported on the consolidated balance sheet, this is non-recourse to the holding companies and there is no debt owed by either Singer Asia or RHDGF itself. As of year-end 2009 there was an additional $1.9 million of free cash at Retail Holdings and $12.0 million at Singer Asia. These figures were not broken out in the most recent June 2010 semiannual supplement, so it's hard to forecast a precise value for current holding company cash, but given this month's US$31.9 million sale of ILFS shares by Singer Bangladesh, some significant additional net cash will likely pass to the holdcos even after considering RHDGF's pending $0.80/share special dividend, again adding a further margin of safety to an already attractive situation.

Management and Capital Allocation

CEO Stephen Goodman owns a 19.6% position in RHDGF common stock, strongly aligning his interests with shareholders. Management constantly reiterates that its plan is to maximize the value of Singer Asia, monetize its investment, and distribute the rewards to shareholders.

"Pending the offering or sale of Singer Asia, realization of the principal and interest on the KSIN Notes and the ultimate liquidation of the Company, ReHo's strategy is to minimize holding company personnel and cost of administration and to use the cash in excess of requirements to purchase Shares and to pay dividends and distributions to shareholders."

Since 2003, RHDGF has showed a consistent and commendable focus on share repurchases and dividends, buying back and retiring over 3.6 million shares and leaving the current total at just 5.24 million outstanding. RHDGF has also issued special cash dividends totaling $1.95 per share between 2007 and 2009, and recently announced another special distribution of $0.80 per share in June 2010. Compensation has also been reasonable, with 12 Singer officers and directors taking home a combined $1.9 million in FY2009, actually down over 10% from the prior year.


Recurrent weakness in the global economy and credit markets could create risk for Singer Asia and the KSIN notes, although the company certainly weathered the recent downturn well. After delisting several years ago to save on prohibitive Sarbanes-Oxley costs, RHDGF is currently traded on the Pink Sheets, but continues to issue audited annual reports and unaudited semiannual reports to shareholders (all past and recent filings can be downloaded at Trading is obviously illiquid; this idea is most suitable for individual investors who, like me, attempt to generate very high returns from carefully selected personal investments. I own shares in RHDGF, and may buy or sell shares without further notice.

Grantham's 10 Things Hampering the Economies of Developed Countries

Michael Burry Has Been Investing in Farmland - Sprott is building the world's largest farm

If you are bullish in agriculture.......

Friday, October 15, 2010

45 Minute Fortune Interview With Buffett

IPAA OGIS 1-on-1 Q&A w/ Summary & Notes

Some serious due diligence on ATP by an investor known as ValuePeg on the Motley Fool Boards.  I'd like to thank him for sharing.

First thing is everyone needs to look over the presentation and listen to the webcast:

Disclaimer: This Q&A was not a recorded interview, this is not to represent exact wording or chronology, the answers are from the best of my memory & notes, exact wording in quotes is used where possible to the best of my ability, but paraphrasing is likely to have also occurred. Parenthesis () are used for my opinions, insights, or where I feel further explanation is required. I do enjoy a significant Long position on this stock, I strongly encourage everyone to do their own DD.

ATPG Questions from 1-on-1 and during break-out session with Al Reese (CFO)

Q - Is the 7,000+ boe/d on MC941 #3 from 1 or 2 zones. What kind of decline rate do they expect on this well? % Oil?

A - In an effort to manage expectations after AT63#4 flow-rates vs actual production they will announce actual #'s on MC943#3 @ next conference call. The well was completed into 2 zones and commingled, it far exceeded what they were expecting with better pressures and "It is not producing 7k boe/d, it is producing 'greater than' 7k boe/d" (the company does not wish to state initial rates, but instead 30 day sustained rate.) "At 3Q results and get into the CC and later this year we will begin to go through the actual monthly or daily production that we have and we honestly believe people will be very pleased with what we see" - from presentation. (Whether this means 8k or 12k, I have no idea but they are sticking to the 30-40 mmboe/d exit rate from 21 mmboe/d prior so 9k may be a good guess for initial modeling). He thought it was like a 70/30 mix (3/23/10 presentation slide #26 - 68% oil 53MMBoe) and shallow decline but was trying to get an answer from George Morris because he didn't know specifically (I was the 2nd person to ask him this but he was still unable to get an answer even by the breakout after the presentation).

Q - The $250M draw ($150M 1st well, $100M 2nd well) on the Titan deal, will it be used to reduce other debt, for additional drilling, or just "corporate needs"?

A - First he confirmed they will be requesting the $100M 2nd draw, but he didn't know if they would request the 3rd or 4th $50M draws. He stated that it just made sense to take the draw as it's a lower interest rate. Didn't get into specifics as just cash on hand but they have plenty of things on their plate.

Q - Current NPI's / ORRI's, ie $ or % production or payback length?

A - Due to confidentiality reasons he couldn't give specifics but in the breakout it was discussed further they are working on a model for analysts to give payment projections etc but it has been very difficult to do so with any integrity as date of wells, expected production, etc have been too hard to forecast with everything going on. We should expect a detailed model before YE.

Q - Have you been able to increase hedges in the last week since oil was over $80/bbl?

A - He's looking to do more now that MC943#3 is online, he did note there were some additions in the latest schedule (slide 31 - but they are only for UK gas in 2012).

Q - What details can you release regarding the possible abandonment of SS358#A003 after the mishap?

A - He became aware of my post on this and went to George Morris to ask him what happened at SS358? George simply told him they did a work-over, cleaned out, swabbed it, put it back online & increased production. (It was due to my posting that was addressed in the presentation - IMO). I did admit there were several industry acronyms etc that I didn't understand i.e. WOW which he knew meant "Waiting On Weather", so he stated George should be able to explain anything else I didn't understand.

Q - MC754 tie back, any updates?

A - The well is completed, the line is in place, on the Innovator they have to do a moon pool and some other modifications. He's sticking to this quarter production. (My impression is mid to late November)

Q - Completion of new Garrow well? Expected production?

A - He expects it to come online end of the quarter. (I didn't ask about production missed that one)

Q - When will 3D seismic information re: Entrada be released? When will reserves be added? When will development details be released?

A - For reserves to be booked there has to be an "Understanding of the permitting process" and there has to be a plan to develop. He believes now that things are becoming clearer that they will be able to get this done and add to YE reserves. They are looking at multiple options currently most likely an undersea tieback to one of 2 platforms one with significant more cost. As far as details we should see them next year, as far as timeline it's to early to tell ther's too much uncertainty w/ regards to government (permitting time-frame etc) it also depends on which plan they end up going with. (My target is 2012 production, with late 2011 or early 2012 start date)

Q - Current production of AT63#4?

A - Still around 4k boe/d to his knowledge, he explained that unless there's a major change he doesn't get updated (+/- 1k boe/d). He doesn't follow daily production from individual wells.

Q - MC943 Oasis - Does it still exist? No plans/mention recently by ATP.

A - No they have lost the lease, they had been in disagreement w/ the MMS for a long time there has now been a court ruling that they have lost the lease. Al did wish to state there were never any reserves booked on the lease so there will be no write-downs associated with it.

Q - MC348 sale of deepwater rights what can you tell me about it?

A - The Appomattox discovery does extend on to our property and it looks very promising, it will have to be drilled from MC348 and it is from those well(s) that we will receive the 10% override. (They wouldn't of paid $15M upfront if they didn't think it was significant) I would like to model very significant cash-flow from this but it is still very early on the project.

Q - Telemark IRR's were missing from last presentation? Why was it missing - not enough data?

A - Sorry we both had to laugh at this question, there simply was not enough information, there was only 1 well online, 1 being put online, and 2 others awaiting permits that you don't know how long it will take to get. He said he could of put one out there but it just wouldn't be credible. (Similar to thowing a dart)

Q - Now that the moratorium is lifted, are you ready to submit drilling plans?

A - He believes that permits for the next 2 Telemark wells can be obtained by YE, so it is possible (not necessarily likely) that MC941#4 is started on before YE. He anticipates that those wells will come online 1Q/2Q 2011 but it really depends on the permits. (My feeling is end of 1Q/2Q)

Q - Do you see a permitting backlog, due to paperwork?

A - In the announcement of the lifting of the moratorium Bromwich stated "Open for business", in all of Al's dealings with Washington recently and reading between the lines that implies that prior they were "Closed for business". Further it has been reported that all permits had to go through Washington lawyers for review previously, he believes that Bromwich's comments are a "Buck stops here" statement and now he's in charge and that they will no longer go through Washington speeding up permitting. He does agree that there has been a lot of BOEMR actually not knowing what the rules and procedures needed to be and most of that should be over or at least ending. (I believe this is very good insight but I wouldn't expect it to be back to usual speed for a while, hopefully early 2011)

Q - I've heard statements that the offshore industry will now be under "Dynamic Regulation", what does that imply?

A - That is not going to happen, there will be small revisions as time goes on, but there will not be an ever moving target as far as regulations. Stop and think if a project takes 5 or so years on average to put in place and will require billions in funding who in their right mind would start a project that the rules on might completely change before you get 1/2 way done.

Q - Is there work that can be done to prepare for bringing on Morgus while waiting for the re-entry permits

A - No, as it will be drilled from the Titan. (It starts from that end is the way I understand it)

Q - Is the Titan and its drilling rig CURRENTLY in compliance with the new requirements? If not, how long until they can get in compliance?

A - Yes, there is nothing in the new rules that wasn't already a part of NTL 5/6 or September Safety Memorandum.

Q - Financing of the topside of Octabuoy?

A - We are literally in China now finishing those contracts with COSCO & Sinosure, they will be virtually identical to the $99M previous deal. So topsides are ~$200M+, $100M will be cash, $100M deferred upon delivery. So in 2012 they will need to write a check for $200M when they take delivery of the completed Octabuoy. Actually instead of writing a check what he sees is a larger subsidiary housing the infrastructure (all?, definitely Titan and Octabuoy). That subsidiary would actually write the check as it would be rolled directly into it upon delivery.

Q - Any credence or information to the rumors of GE's buyout offer? (This question was brought up in the 1-on-1 and in the breakout session)

A - The company has a standing policy of non-disclosure and no comments on pending deals. So I can tell you 2 things, in regards to the NY Times article "If the article got everything right every fact straight or if the article was total BS and never occurred my reply would be the same - 'No comment'". He restated that making a comment confirming or denying any statement in part or whole or even to state that it was entire BS would be making a comment and that would set a precedent that they do not wish to do. (Read into it what you will, as far as my opinion - "No comment")

Q - 2011 Capex?

A - ~$500M = $300M GOM + $200M UK. This breaks down as Telemark $100M cash, Gomez $100M NPI + $50M cash, GOM other $50M cash, Octabuoy $100M cash + $100M COSCO/Sinosure.

Q - Insurance availability? Impact of insurance rates in GOM?

A - We've talked to our insurance company and we will have no problems obtaining insurance. No significant change in Cost per unit, but we will require higher coverage of $150M due to larger worst case scenario as a result. This year has been a busy year as far as number of hurricanes, but it was relatively quiet in the gulf which will help. He was unable to give specific numbers yet but said it will not be a problem.

Q - How do the new regulations affect ATPG?

A - The new regulations are broken down into 3 areas:

1. Safety - we have an excellent record and it shouldn't be of any concern

2. Spill containment - Each company does not have to provide this as they can contract this with a spill response service, which we do.

3. Blow-out prevention - Our only drilling is from the Titan where we have a sub-sea SID (Shut-In-Device) a SBOP (Surface Blow-Out Preventer) with dual shear valves. We more than meet requirements.

Additional things covered of importance:

As far as # of well bores in deep-water ATP is #2 of Independents & #4 including super-majors, this was actually a total surprise to both myself and Al Reese. Now I pointed out that it must be production wells, not test wells or evaluation wells, in the presentation he stated operated wells not sure if he went back and checked. This is important though as it increases our expertise value as it has been discussed that other companies have been coming to us with possible JV's. "ATP is currently being courted by others", ATP is looking at other areas around the globe. In the presentation he stated that they had some very interesting targets for 2011 & 2012.

As far as 2011 permits MC941#4 and MC942#2 paperwork will be in this year and Al believes there is a chance of getting them back by YE, MC711#9 & MC711#10 paperwork submission may fall into early 2011.

Very large shift in reserves coming at YE currently a large percentage is in Proved Undeveloped, a large portion of that will be transferred into Proved Developed. This is important for a variety of reasons from company valuation Proved Developed is typically valued close to PV-10, while Proved Undelveloped might be priced close to PV-20 or PV-30. It also helps with credit & financing rates. Obviously there will also be a large shift from Possible to Proved as they 2 Telemark wells came on this year which is equally beneficial. This should help how people look at the balance sheet also as only Proved reserves are included.

Because of new permitting rules & confusion Al believes there will be an abundance of equipment available which should put downward pressure on price.