"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.
: 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 has been growing consistently during the last 6 years, and rose from approximately 1,000 boepd in 2006 to 19,200 boepd in December
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.
: Twin Butte was the most acquisitive Canadian energy company in 2012 after Crescent Point Energy Corp (TSE:CPG),
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
) 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 debt
was $205 million, or 1.4 times Q4 annualized cash flow.
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.
The average target
price from the 15 analysts who cover the company is $3.46.