Sunday, October 24, 2010

Response To The Critique of My Petrobank Analysis

This is my response to the recent article by Devin Shire in response to my article on Petrobank. 

You be the judge. 

The entire article can be found here:

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.

No where was I “very critical” of your analysis. All I said was that you presented an interesting, “heads I win huge, tails I win big.” That is a huge statement and better have substance behind it.

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.

This is not true. The 2P number does include drilling locations to be drilled over the next few years. In fact, the 1P number may also contain Proved Undeveloped reserves or PUDs. These are generally wells that are going to be drilled over the next 12 months located next to proven producing wells. I am not missing 2/3rd of their Bakken assets. Please read the reserve report before you demonstrate your ignorance.

Let me again quote from the reserve report that Mr. Shire has now demonstrated for us has not read.

"The Sproule Report has assigned proved undeveloped reserves to 207 net light oil well locations in the Bakken properties in southeast Saskatchewan. In addition, the Sproule Report has assigned proved undeveloped reserves to 90 net light oil locations in the Conventional properties located in southeast Saskatchewan and Manitoba."

Now that is approximately 300 wells that will be drilled to the end of 2012 that are already booked as reserves.

Oops… Now is Mr. Shire telling the truth or is he just using deception to promote his book?

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.

Wow, Mr Shire seems to know the value of these wells before they are even drilled. Just because you have land doesn’t prove it is going to be productive, let alone be even close to the most productive area of the formation. This is pure fantasy until the wells are drilled and economics proven.

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.

No please don’t stop, I haven’t missed the majority of the value in my analysis. I am far more familiar with this industry than you would like.

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.

You be the judge. Who has read the engineering report and who’s been reading newspapers? Mr. Shire doesn't seem to understand which wells are and aren't on the books.

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.

Now this shows a significant problem with how Mr. Shire determines the value of, well, anything. Just go look in the companies overhyped investor presentation and repeat it’s contents.

First, I don’t figure that the value is $367 million. That is the value the engineering report gave to the probable reserves. Call Sproule and discuss your issues with them.

Secondly, this creates another problem with inexperienced investors. Let me explain with an example. Connacher (TSE-CLL) is another oil & gas company that was touting the exact same thing a few years ago. They had this huge value of oil sand assets. The ignorant investors simple took the total value of from the investor presentation and divided the shares outstanding and came up huge value per share. The only problem was coming up with the billion plus dollars to get the project on production. Obviously it was going to take a huge amount of debt or equity to get the project off the ground. Obviously the faithful didn’t want to hear what I had to say, apparently Mr. Shire doesn’t either.

Some many investors fail to realize that heavy oil and oil sands are very capital intensive and return generally haven’t been that good. The only exception was back when oil was $130.

Beyond this Mr. Shire states that I am missing a bunch of speculative assets, such as land and “highly prospective” properties. Ok, maybe I am. As I said before if Mr. Shire wants to call this value investing, go ahead, perhaps he needs a new definition.

I am really over having to explain myself Mr. Shire. I have written enough here to prove who knows what they are talking about and who don’t have a clue. If I ever write a book it will be called “defying economic gravity.” Everyone tries to do it but eventually they come crashing back to reality.



  1. Come on kid. Give it a rest.

    Yes, the P2 number is based on 348 drilling locations. Just as I said. 348 locations out of the 1,050 that Petrobakken has in the Bakken.

    And yes that covers them through 2012. Petrobakken and Crescent Point are the two big boys in the Bakken. They have a minimum of a decade of drilling to do.

    And to suggest that the Cardium acreage is "prospective" shows that you have not spent any time following the drilling results from the play in the last 6 months.

    I'm not going to convince you, I understand that. You have your back up against the wall.

    I show you that you missed more than half of PMG's reserves and production and you just brush it off saying that the stock price already reflects this.

    Your analysis based exclusively on PV10 numbers is not an appropriate way to value a company that has hundreds of thousands of acreas geologically proven areas like the Bakken and Cardium.

    Perhaps we should just agree to disagree and move on ? Both of us are wasting time and accomplishing nothing.

  2. No problem Grandpa.

    My analysis is entirely an appropriate way of valuing the company. Speculation on prospective land is different from value investing.

    You said and please reread the bold print from your latest article. You said the 2P reserves only include the wells that have been drilled. That is NOT TRUE. It includes all of the wells drilled and planned to be drilled to the end of 2012. This is what I quoted from the Sproule report.

    I already agree to disagree, that is what makes a market.


  3. If I understand this correctly, your analysis is not missing 2/3rd of Petrobakken's Bakken assets, just 1/3rd of them. Is that right?

  4. No I am not missing 1/3 of there assets. However, I am not including 1/3 of the POTENTIAL wells for several reasons.

    First, they will not be drilled until 2013 at the earliest, so it is hard to determine economic viability that far out. Also if you discount the value back to today, that value is considered insignificant and thus isn’t included in the reserve report.

    Lastly, the company will book the best wells. These last 1/3 potential wells will be step outs or fringe areas where geology and economic are both questionable. Also reasons for excluding from reserve report.

    Every company out there has outlandish drilling opportunities on their existing lands. Pick any O&G company and just read their corporate presentation. Why then do they constantly acquire more land? Good question to ask yourself.

    Thanks for the question,