Tuesday, November 1, 2011

Bellatrix Exploration

I was recently asked by a visitor to my blog on my thoughts on Bellatrix Exploration. I was away last week on business and wasn’t able to respond.  I have decided to write the response here for everyone to enjoy.

Background

Bellatrix is an E&P company that formerly was called True Energy Trust. True was a created in 2005 via the arrangement with TKE Energy Trust (formerly TUSK Energy) for those who remember back that far. 

Now, just for the sake of a history lesson, True Energy Trust was a disaster from a financial point of view. Since 2005 till the end of 2009 when they changed back to a non-dividend paying E&P company they had cumulative losses of $390 million dollars. In fact they only turned a profit in of $14 million in 2005, and losses were $234 million, $24 million, $20 million, and $127 million, in 2006, 2007, 2008, and 2009 respectively.

So obviously they weren’t good explorers, but then again most income trusts weren’t good explorers. Most were legalized ponzi schemes whose distributions consisted entirely of return of capital.

Bellatrix 2010

In 2010 the company transitioned back into an E&P company. Company started getting into some plays such as Cardium oil and Notikewin gas wells. Losses in 2010 totalled $28 million dollars, bringing the cumulative total to $418 million since 2005.

Bellatrix 2011

In 2011 the company continued pursuing oil in the Cardium and liquids rich Notikewin gas. Of interest, shareholders should be aware that upon transition to IFRS accounting the company incurred impairment of $44 million. You know a few million here and a few million there... these losses are starting to add up.

Now the good news is the company is starting to turn a profit. In Q1 2011 the company would have recorded a profit of $2.4 million if we neglect the $10 million loss on hedging (actual loss was $5.5 million). In Q2 2011 the company would have realized a profit of $5.1 million if we neglect the $10 million gain on hedging (actual profit was $12.3 million).

So if we isolate profits actually attributed to operations in the first half of 2011, the total is approximately $7.5 million (assumes hedges are a wash in the long term).  We have to keep in mind that oil prices were over $100/WTI bbl in Q2 and they have declined somewhat.

Now if we make the assumption Bellatrix can maintain the level of profitability they had in Q2 and annualize the results, annual profits would run about $20.4 million. Shareholders equity was $359 million at the end of Q2. This gives an annualized return on equity of 5.7%. This is nothing to write home about.  Because the company employs leverage the return on total capital is even less.

Reserves

Net Asset Value (NAV) for proved reserves is around $3/shr and NAV for proved and probable reserves is around $4.75/shr.  The price deck for WTI oil used in the reserve report was $100/bbl till 2015, which is quite aggressive in my opinion. I am pessimistic on oil prices going forward.  

Secondly I estimated their netback to be around $25/boe with all in finding and development cost of $15/boe (Please note that you cannot use managements numbers that don’t include future development capital). This gives a recycle ratio of 1.7 times, which is nothing to write home about. At the end of the day you need to be consistently above 1.5 times if you want to add any value.  

Book value for the company is $3.11/shr at end of Q2. Considering they can earn about 5-6% on equity capital with $100 oil, I wouldn’t consider BXE a fantastic business.

Management

One thing I noticed when reading BXE news releases and other information is that it really isn’t shareholder friendly. For example, they like to quote finding and development costs excluding future development cost.  Whenever you see that, don't let management pretend your some sort of fool.

Secondly, I found the graphs of the share price increases of predecessor company run by current management to be quite humorous. First, Meridian Energy was acquired by True Energy in 2005. Given the level of losses occurred since that date the takeover was obviously a failure for True shareholders and a gain for Meridian shareholders. Secondly, oil and gas prices increased significantly during the years 2002-2005 so it wasn’t some sort of magic that caused Meridian’s share price to compound at 104% annually. Any idiot could have purchased assets during that time and watch the value magically increase due to the increase in commodity prices. 

Conclusion

Bellatrix is at best a mediocre company that has been performing a little better as of late. Given the track record of the company (current management has been in charge since 2007), I wouldn’t invest in such a money losing operation if you paid me.  I would want to purchase the assets at a significant discount to book value or NAV to protect myself from potential issues down the road.

I rely heavily on good management with a solid track record and I don’t get that with Bellatrix.  Instead with the name change from True Energy into Bellatrix, all you get is lipstick on a pig.

The current price for a share of Bellatrix doesn’t offer any downside protection if oil prices fall.  I happen to feel oil prices will fall over the next few years so buyer beware.  You know I may well be wrong on oil prices, but if you step back and take a look at the forest instead of the trees you will see how high many commodities are today.  The nice thing about the markets is that you can totally avoid the potential bubbles and crazy asset prices. 

I know many of my critics will say the same thing about the bank stocks I own.  Don't worry, I'm well aware of the issues.  It's just that those stocks just happen to be very cheap right now and in a few years todays the market will be singing another tune.  A good rule of thumb I tend to ask myself is this, has the sector done very well or very poorly over the past five to tend years?  If the sector has done poorly I like to look for cheap stocks to buy and if it has done well I tend to look the other direction. 

Reversion to the mean is a hard lesson some people never seem to learn.  Some people just don't have what it takes to own companies that the masses consider to be trash.  Separating the facts from the emotional fiction is what value investors enjoy doing. 


Best Regards,
Kevin


Disclosure – none

7 comments:

  1. Hi Kevin,

    Can you please expand on this part?

    "One thing I noticed when reading BXE news releases and other information is that it really isn’t shareholder friendly. For example, they like to quote finding and development costs excluding future development cost. Whenever you see that, don't let management pretend your some sort of fool."

    Thanks in advance,

    ReplyDelete
  2. Hi Brian,

    I don't know what you want expanded.

    First management should be candid and tell you the pluses and minuses of your business, not all the positives.

    On the finding and development costs, they quote F&D costs excluding future development capital in their investor presentation. This is often the only thing an individual investor reads. It's too bad.

    F&D cost has a numerator and a denominator. The numerator is the capital spent and the denominator is the amount of reserves found. Now Proved Reserves (1P) included reserves that have not been drilled or brought onto production. Now when the company files the reserves report they must state the capital requirements in future years to get these reserves on production.

    If management takes credit for these reserves without including total capital it will take, they are not being candid. The numerator of the calculation will be smaller than it normally would be.

    I hope this helps.

    Regards,
    Kevin

    ReplyDelete
  3. For another opinion, see:

    BXE Cream of the Cardium Plus the Duvernay
    9-16-11

    its conclusion:

    Over the next 6-9 months I would anticipate some of the following to occur which should bode well for the stock price:

    1. Multiple expansion based on top tier growth & production.

    2. An analyst Cardium curve upgrade and/or revision to reflect recent improvements in productivity and well costs using slickwater fracs.

    3. Increased Notikewin & Cardium drillables reflected in the stock price and analyst 2012 reports (increasing risked NAV and subsequent price targets).

    4. 2012 reports outlining robust projections for 2013.( I could see 2012 exit production of almost 20,000 boe/d accompanied by higher targets based on 2013 projections of increased C/F & production).

    5. The Hot Liquids Rich Duvernay play being given value by the market and analysts based on risked upside, land value and/or net sections and drillables pending results.

    6. Takeout premium returning based on large drilling inventory of top tier assets that would be desirable to many high yielding former trusts.

    In short BXE represents great value, the story has gotten better and in time I expect the stock to make new highs.


    http://www.investorvillage.com/groups.asp?mb=6781&mn=67927&pt=msg&mid=10954889

    ReplyDelete
  4. Hi Doobiedoo,

    I can appreciate your points, however, can I offer some constructive critism in return?

    1) Almost all of your points can be said of any company.

    2) Analyst reports aren't worth the paper they are written on. They are written to generate trading revenue.

    3) I wouldn't speculate on the goodwill of others. Multiple expansions or high takeout prices are difficult to predict.

    4) "Hot Plays" come and they go. Be careful investing in them.

    Good Luck with BXE.

    Regards,
    Kevin

    ReplyDelete
  5. I don't regard BXE as a "hot" play now. If it achieves a transformation to 60% liquids by the end of 2012, as planned and now being executed, it may well become a very desirable investment. Given its land positions I would not be surprised to see it taken out, as was Daylight, which also has great assets in the Cardium, et al.

    ReplyDelete
  6. Bellatrix is currently $9.07, same management. How's that "reversion to the mean" working out now Kevin?

    ReplyDelete
  7. "Your neither right nor wrong because the crowd (dis)agrees with you. Your right because your facts and your reasoning is right" - Ben Graham.

    I would love to see your valuation. My email is on the site.

    ReplyDelete