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.
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.
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.