Saturday, October 23, 2010

Petrobank Energy (PBEGF) – A Terrible Risk/Reward Scenario

I just submitted this article on gurufocus.  After reading some over-hyped analysis by a guy named Devin Shire, I decided to dig in and do some analysis myself.  The stock option pricing were quite a revelation, and it seems to be shaking things up over there.  You can check it out here:


  1. Kevin,

    That article was kind of mean spirited don't you think ? How much time did you spend researching PBG before you wrote it ? Have you looked at other similar companies before ?

    I've made some comments on my blog. I can't say that I found your analysis terribly helpful.

  2. Hi Devon,

    Please don't take it as mean spirited, not my intention. You present a very interesting investment opportunity and I wanted to investigate it for myself.

    As for time I spent the approximately 6 hours reviewing the AIF's, 2009 Annual Reports, and the latest quarterly reports. I regularly look at O&G for opportunities.

    You touted this investment as a no brainer and I simply want those on the web to know that is simply not the case. I just wanted to present the other side of the story and protect those who may invest based on your opinion. You presented all upside and no downside, very dangerous.

    How can you write such a rosy report on PBG and not even mention the problems with the stock options they utilize? Have you even read the annual or quarterly reports, start to finish? I don't mean the press release either.

    If you disagree with my facts, which ones and why?


  3. Kevin Graham,

    I have to say, your article is very telling. You obviously don't have as much knowledge and skill as you think. You set the tone of your article as if you know more than everybody else on this topic, and yet all your analysis in your article could of been done by any value investor with intermediate knowledge in less than 10 or 20 minutes. I usually wouldn't say anything, but you came across as if you had special insights and superior knowledge. And then all you do is calculate PV-10 for oil reserves. Almost comically poor analysis from a pompous individual.

  4. You are right, it is a simple analysis. The problem is you need a starting point and the current reserves are the best place to start. As I stated there can be other assets beyond reserves but I haven't seen anyone lay out a specific valuation for them. I simply don't know and could do more research.

    If you want a comically poor analysis, read the bull case for this company stating value of $80 per share based on some pie in the sky estimates.

    Feel free to post your analysis of facts of what I am missing. I'm very interested in how to arrive at the $80 per share value.


  5. "As I stated there can be other assets beyond reserves but I haven't seen anyone lay out a specific valuation for them. I simply don't know and could do more research. "


    So you haven't seen anyone lay the value of the assets out for you so you don't bother doing it ? Then you write and article and dedicate it to David Einhorn as though you have done some serious deep value work ? And further suggest we all should burn the work of all analysts ?

    You missed 75% of the value in the Bakken for PBN because it doesn't hit reserve figures until wells are drilled. Anyone who follows the industry knows that land in the middle of the Bakken is about as low risk as it comes. You don't need to drill a well to know what is there. Ditto the 150,000 acres in the Cardium which you have completely ignored.

    What you missed on Petrominerales though is much larger. More than half of PMG's production comes from wells that were hit after the 2010 reserve report was finished. By not being aware of this you have missed at least half of the value of PMG's known reserves.

    Here is the detail on the size of the discovery.

  6. Thanks to both Devon Shire and Kevin Graham for this fascinating discussion.

    The land value has a mark-to-market value which is included in PBN's estimation of shareholder's equity. My understanding is that PBN is selling close to book value and is therefore a valuable stock, if you are bullish on light oil. The prices of the lands in the Cardium and the Bakken have greatly increased as a result of new drilling techniques that make it possible to exploit oil that vertical drilling has not been able to extract. Therefore, I'm really surprised that Mr. Graham has chosen to discount these lands as zero: at very least, PBN could sell these assets to other companies and return to the shareholders their money. It seems to me that Devon Shire's analysis is much more in keeping with the common understanding that I've read in numerous articles regarding the potential of these plays in the Cardium and the Bakken--and that is why the price of these lands have greatly increased. Personally, I have significant stake in this region and I see it as "value" investment (I own shares in CTA, MEL, PBN, CPG, to name a few). At this point, many junior and medium oil companies are selling at very good valuations vis-a-vis book value. This part of the Canadian oil sector is beginning to catch fire, as commodity prices rise with the devaluation of the US dollar and with the increased demand for energy in the emerging markets.

    The inability to know for sure the value of the land is due to the speculative nature of oil investing--we won't know who much the land is really worth, until every last drop of oil is extracted. In the meantime, is there a good likelihood that the oil in these lands will be lucrative to investors? Yes indeed. Drilling in these regions have proven to have a high success rate. Perhaps this doesn't classify as Buffet-style investing, but then again, Buffet never invests in something he doesn't understand--and I don't think he knows the oil business that well, especially as compared to insurance.

    Thanks again.