Petrominerales cashes out
The South American oil producer catches a bid from Toronto-based Pacific Rubiales. But for investors, the story isn't quite over just yet
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
If there’s anyone still hanging around from the days when it traded above $30 a share, the takeover bid that Pacific Rubiales Energy tendered for Petrominerales (TSE:PMG) probably doesn’t look particularly good. At just $11 per share, plus one share of a Brazilian exploration company (“ExploreCo”) to be created from their combined assets and an initial injection of $90 million in cash – it’s a far cry from the upside some saw for the company and its Latin American assets. But given the recent string of exploration failures and operational issues – and the fact that it represents a 42 per cent premium over its last closing price – it’s hardly a lowball offer.
And for particularly bold traders, there’s a potential arbitrage trade to be made. Petrominerales shares are trading at around $11.65 right now, but FirstEnergy’s Darren Engels has a $12.70 target on its shares. He allots $11 for the cash value of Pacific Rubiales’ offer, plus $1.70 for the ExploreCo share. “The $1.70 per share of value we attribute to the ExploreCo. in our target price is based on prior spending in Brazil and the initial cash injection of $90 million ($1.06 per share), net of the acquisition of Alvopetro for the remaining 25 per cent working interest in the Brazilian entity,” he wrote. “Due to the early stage exploration ongoing in Brazil, we do not currently assign incremental value beyond this in our target price, but recognize other Blocks in the Reconcavo Basin garnered much higher per acre valuations during the recent Brazilian Bid Round.”
That’s about a buck per share, give or take a few cents, in potential upside. But according to AltaCorp’s Dana Benner, there’s far more waiting for shareholders willing to step into Calfrac Well Services (TSE:CFW). Its shares are already outperforming those of other frackers in the Canadian market in 2013 (they’re up 25 per cent year-to-date, compared with Trican’s seven per cent bump, GasFrac’s six per cent increase and Canyon’s three per cent rise) but Benner thinks there’s far more to come – as much as 50 per cent, according to its $47 target price versus the $31 it’s trading at right now. Why? In short, it has the most exposure to western Canadian LNG because of its relationships with Progress/Petronas, Shell and Cnooc/Nexen. “Canadian margins for CFW are thus biased higher going forward on the back of greater fracking volume,” Benner wrote. “This is not commonplace yet across the Canadian oilfield service sector (expanding margins). As well, lower realized Canadian natural gas prices (and follow-on lower E&P spending) are unlikely to hamper the expansionary margin effect of LNG fracking for CFW (out to 2014 and beyond). Indeed, CFW noted recently that it has a very strong backlog out to March 2014.”
It’s also well diversified, with operations in Russia, Latin America and the U.S., where its margins have been particularly solid of late. And it has a first-rate management team that has a track record of making smart, strategic and accretive acquisitions. “In sum,” Benner writes, “Calfrac has done an excellent job at positioning itself for the next major theme in Canada – LNG, a driver that is only beginning. Fixed cost business models like fracking companies do particularly well amidst this type of opportunity. We reiterate our $47.00 target and Outperform rating.”