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Denbury Resources Inc. Message Board

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  • harehau harehau Apr 8, 2008 9:36 AM Flag

    Question for the board re Petro-Canada

    One other factor is Canadian dollar strength currently and if you get erosion but with the strength in commodities, that appears to be remote for the near future.

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    • James et al,

      I will try and make these PCZ comments as comprehensive as possible. First the usual metrics on evaluation based on market enterprise value: $65,000 per FBOE/day (flowing barrel of oil per day), $19.77 per BOE of reserves (proved only), $3.29 per MCFE, approximately 5X OCF. So, they're very cheap by all metrics save perhaps for the reserves evaluation where they are sort of cheap. Do they deserve to be cheap?


      (1) appear to be prospect rich and advertize that they have 1.315 billion bbls. 1 P, 2.409 billion barrels 2P and 15 billion barrels 3P

      (2) Cash flow is substantial and covers most of planned capex and a shelf offering for $4 billion of debt is in place covering next 24 months, therefore dilution is unlikely.

      (3) Current debt of $3+ billion plus $4 billion would create a company with approximately 30% leverage which is acceptable to me but which will hurt evaluation in the eyes of the market. That means that 30% debt is useful longer term because it favors the business plan but it is a negative shorter term because it subtracts from evaluation in a market which is leverage-averse.

      (4) Bulk of planned growth is in oil sands which is the prettiest girl at the dance according to the market.

      (5) 250% Reserve replacement on a 2P basis

      (6) 21 % annual production growth YOY '07:'06


      (1) Reserve replacement on a 1P basis is, however, only 194 mmboe or 127% and is 85 mmboe reserve revisions--a very poor performance.

      (2) The exploration program is, very nearly, a joke. A 17 well program at $350 mm of cost with very little found.

      (3) Thus, to the extent that PCZ is actually prospect rich they are so only as a consequence of oil sands so far as this typist can figure. So many of your PCZ eggs are in just one basket.

      (4) Ditto for projected OCF growth the bulk of which comes from oil sands.

      (5) Despite oil sands development cost containment ideas developed by PCZ there is risk here.

      (6) Oil sands returns long term are significantly dependent on $90 oil and $7 NG per their IRR charts. This is the most important thing to know about PCZ so I'll expand on the idea. I should have checked to determine the hedging on the NG requirement but I didn't have time as I'm working on a tight budget--bupkiss--for this project. What PCZ and the others are doing is partially mmbtu arbitrage. And they advertise that they are doing it at 12:1 when the natural ratio on an mmbtu basis is 6:1. If we return to the natural ratio for any reason in NA then PCZ's business plan is in for some considerable trouble to the extent that they have not insured supply of NG at fixed cost.

      (7) Downstream, which is 20% of the company will be a drag this year.

      (8) PCZ could be a takeover candidate because of the metrics but the number of acquirors is fairly limited. Petrochina would be a logical acquiror if it could be managed.

      If I were to sum it up, I would say that PCZ would be a very good long term investment if the market MMBTU basis remains at 10:1 or higher. Because many of the growth metrics at the company are based on very long term ideas a reasonable holder of the equity would very carefully watch the cost basis for development of reserves and production including NG during the next several years as this is the period when PCZ is most vulnerable to cost problems which could pose a threat to the business plan.

      Finally, if someone knows from a 10K or other document about PCZ's ability to contain NG production costs in the oil sands over time would they kindly post the link or a reference?



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