Heavy Oil Differentials:
Canadian heavy oil companies were severely hit in 2012 by the spread between WTI and WCS (Western Canadian Select) due to pipeline capacity constraints and refineries. This spread hit $42 per barrel in December 2012, which is the lowest in five years
. Twin Butte’s CapEx in Q4 2012 were reduced
by $4 million from the company’s budget due to the differential situation. However, there are several major pipeline projects currently under construction in North America with a completion date in 2013-2014. The recent Seaway’s expansion
is just one of these projects that aims to narrow the differential between WTI and WCS. BP’s refinery resumption
is scheduled for Q2 2013, further expanding the refining capacity in North America and increasing the operating netback of the heavy oil players.
Significant Discount To Heavy Oil Producers
: With a production of 17,100 boepd currently due to the downtime experienced in January, 2P reserves of 60 MMboe and Enterprise Value (EV) of $765 million, Twin Butte trades for $44,700/boepd (90% oil & liquids) and $12.75/boe of reserves. Twin’s production
is 83% heavy oil. Baytex Energy Corp (NYSE:BTE)
has 54,000 boepd production
currently, along with 234 MMboe 2P reserves and EV of $6.2 billion. This gives $114,800/boepd (88% oil and liquids) and $26.5/boe of reserves.
is 73% heavy oil. Berry Petroleum Company (NYSE:BRY)
of 39,500 boepd along with estimated 2P reserves of 360 MMboe and EV at $3.6 billion currently. Thus, Berry trades for $91,100/boepd (78% oil and liquids) and $10/boe of reserves. Berry’s heavy oil accounts for 49% of its production
: The company views the Primate situation as an isolated performance issue
, and it is currently deploying remedial efforts to address this issue. However, the result remains unknown at this point, and this uncertainty concerns investors. If the problem lasts for some months, the company will have to change its projections for 2013 and adjust its dividend policy downwards.
Commodity Volatility: Twin Butte is oil-weighted and its operating cash flow is related to WCS. The commodity volatility can’t be fully removed because the company’s existing hedge position covers approximately 45% of the total oil production. If the oil price drops significantly in 2013 and WTI’s premium over WCS widens further, the operating cash flow will decline substantially and the corporate capital plan will have to be modified accordingly.
The bottom line is that any company encounters temporary operating issues, and this is what is likely going on with Twin Butte. The big picture is that the fundamentals havn’t changed, and this is enough to allure fundamentals-driven investors to establish a substantial position at the current levels.