Is Twin Butte Energy Ltd. (TBE) On The Operating Table?

By The Motley Fool in News

Published: February 12, 2013 at 12:05 pm

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"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 Ltd. (TSE: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.

Strengths

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 annualdecline 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 Corp (TSE:CPG), 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.

Annualized Debt/FFO < 2: The company hasn't any debt issues, and year end 2012 net debtwas $205 million, or 1.4 times Q4 annualized cash flow.

Hefty Dividend: The shareholders are handsomely rewarded by the corporate dividend policy on a monthly basis, as the current annual yield is 8.5%. It is also worth noting that the dividend isn't at stake because the all-in payout ratio (dividend and capital expenditures) will be maintained at 100%, ensuring the dividend sustainability.

Target Price: The average target price from the 15 analysts who cover the company is $3.46.

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Category: News