“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.
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.
Performance Issues: Since late December 2012, Twin Butte has been hampered by a number of operational and reservoir performance issues. Significant downtime was experienced early in January on the heavy oil operations, as the Lloydminster area encountered cold temperatures which created freezing, and run time-related issues on a number of the wells. The wells at Primate Property lost inflow or were experiencing high water cuts. Primate was one of the company’s best performing properties in 2012, but over the last 40 days has seen its production drop from a high of 3,400 bbls/d, by 800-900 bbls/d.