The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table." - Warren Buffett.
Twin Butte Energy (TSX: TBE) is a yield play from the energy industry that is focused on large original oil in-place conventional heavy oil exploitation. The stock hit some speed bumps a few days ago and has plunged 25% since then on unusually high volume. Will the knife keep falling? To find out, let's take a close look at the Strengths, Weaknesses, Opportunities, and Threats now that the blood is in the streets, because this may be a big buying opportunity.
Tax Pools: The company has $580 million in tax pools. To an acquirer, these tax pools can shield $145 million of income at a 25% tax rate. So a potential acquirer would have to pay $0.58 per share for buying only the tax pools.
Production Growth: Production has been growing consistently during the last 6 years, and rose from approximately 1,000 boepd in 2006 to 19,200 boepd in December 2012.
Low Risk and Low Decline Wells: The company has a low risk, heavy oil inventory of over 700 net wells that provides 5-6 years of high capital efficiency. Additionally, the base annual decline for these wells is as low as 28% in a concentrated asset base around Lloydminster with year round access.
Low Cost Wells with Short Payout Period: The average vertical well cost ranges from $515,000 to $615,000 with an average initial production of 40 - 80 boepd, average reserves per well of 45 - 80 mboe, and a short payout period of 0.8 years.
Funds from Operations (FFO) Stability: The volatility of the operating cash flow for 2013 is significantly reduced because the company has a strong hedging position in place.
Aggressive Bidder: Twin Butte was the most acquisitive Canadian energy company in 2012 after Crescent Point Energy, which acquired 6 smaller producers in 2012, expanding its core areas which extend from Canada (Beaverhill Lake, Viking, Bakken formations) to the USA (Uinta Basin). Twin Butte has also been on a consolidation spree and has acquired 5 peers (Swimming, Emerge, Avalon, Wildmere, Waseca) in the last 12 months, significantly growing its drilling inventory, which currently is estimated to be over 700 net heavy oil wells.