Petrobank Says Goodbye To PetroBakken But Is There Any Value Left Behind?

Petrobank Energy (PBG.TO) is officially cutting the cord with its majority owned subsidiary Petrobakken (PBN.TO). While the company first listed a piece of PetroBakken back in 2009, it only recently announced plans to spin off its remaining 57% stake. The transaction seems a bit complex, but in the end, there will be two companies: a new Petrobank and a new Petrobakken. Current Petrobank shareholders will receive one share of the New Petrobank for every share of Petrobank owned. The transaction is slightly more complicated for PetroBakken and will play out as follows: existing PetroBakken shareholders will receive one share of the New PetroBakken and PetroBank shareholders will receive New PetroBakken shares based on the PetroBakken/Petrobank exchange ratio (# of Petrobakken shares owned by Pbank/# of Pbank shares) on the effective date. The ratio as of the press release was between 1.06 and 1.10.

The new Petrobank will essentially be a junior heavy oil E&P company with some IP and consist of the the current Petrobank (heavy oil assets and related patents and ~$100m cash) minus the Petrobakken subsidiary. The $100m cash is important as the company’s heavy oil unit has generated exactly zero revenues and is still in the exploration and evaluation stage. The company claims that the $100m is sufficient to ‘fund operations for more than two years at current and expected expenditure rates’. For additional information on Petrobank, check out this company presentation.

Things will pretty much stay the same at PetroBakken and there will be no changes to the company’s operations or management team as a result of the transaction. The company will still focus on light oil E&P in various locations in Canada. The only difference will be in the ownership which plays out in the dividend space (and shareholder voting). PetroBakken yields ~8.7% and the proceeds from Petrobank’s stake currently goes to Petrobank the company, but post transaction, the shareholders will reap those benefits. For yield starved investors, that number is pretty attractive. For additional information on PetroBakken, check out this company presentation.

The reorganization is subject to shareholder approval at both companies and the expected date of the transaction is December 31, 2012 which should be important to all US shareholders. While the transaction is not expected to be taxable to Canadian shareholders (it can be in some cases – check with your accountant), it will be treated as a ‘qualified dividend’ for US shareholders. With tax rates expected to go up next year, that could make a difference.

Petrobank is currently valued at ~57% of PetroBakken’s market cap meaning the market is placing next to no value on the rest of the business. Not surprising, as even the company itself acknowledges that heavy oil is currently out of favor and viewed negatively. Heavy oil requires a much higher price per barrel in order to make economic sense so it is no surprise that it goes in and out of vogue with the price of oil. Adding even more risk is that the company is really a bet on the successful commercialization of its extraction technology which hasn’t yielded too many positive results to date.

This situation looks interesting and considering both companies are public, the amount of data to analyze should be plentiful. As is usual with spinoffs, potential takeout rumors are floating around regarding the new unencumbered PetroBakken. It is also worth noting that these names are rumored to be very popular amongst hedge funds taking advantage of ‘arbitrage’ opportunities and that has occasionally led to some ‘mispricings’. I hope to do some more work on this one and as always, we will keep you updated. Feel free to drop a line.

Disclosure: Author holds no position in any stock mentioned.