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An unfettered PetroBakken likely to draw suitors

Investors in Petrobank Energy and Resources Ltd. hit a nice little jackpot with the company's plan to spin off its 57-per-cent stake in PetroBakken Energy Ltd. to shareholders. But the big lottery win might be still to come: a takeover of PetroBakken.

Petrobank's shares jumped as much as 10 per cent during Tuesday's trading session on the news, and justifiably so on the very face of the proposed spinoff.

Petrobank owns 106 million PetroBakken shares and has roughly 100 million of its own shares outstanding; that means every shareholder will receive a little over one PetroBakken share for each Petrobank share they hold. Those PetroBakken shares were trading at $12.38 prior to the announcement – inexplicably, 18 cents a share more than Petrobank's stock. The company's stake in PetroBakken alone was worth more than the market was valuing the entire Petrobank.

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It doesn't take a rocket scientist to figure out that by splitting the companies, Petrobank shareholders instantly see more value for their investment – even if you value Petrobank's non-PetroBakken assets (mostly in heavy oil) at zero. Given that those assets will come with $100-million in cash, that alone is worth another $1 a share.

Toss in PetroBakken's generous 8-per-cent dividend yield – a payout shareholders in Petrobank (which pays no dividend itself) didn't see before, but will now receive directly as a result of the spinoff – and this is beyond a no-brainer for Petrobank investors, who have been frustrated by the company's inability to unlock shareholder value.

But by unfettering PetroBakken from its majority shareholder, the spinoff may ultimately unleash even more value for the shareholders of PetroBakken – which, as a result of the spinoff, will soon include all of Petrobank's shareholders, too.

PetroBakken is just the kind of Canadian energy company that has made big strategic foreign investors foam at the mouth lately: A mid-sized producer with a digestible market cap (a bit over $2-billion), accelerating production growth and an asset base in a high-potential area for unconventional production. Specifically, PetroBakken holds properties in the Saskatchewan portion of the Bakken formation, one of North America's hottest shale oil plays.

Sound familiar? Shale oil and gas are all the rage with foreign heavyweights. Exxon Mobil Corp.'s $2.6-billion bid for Celtic Exploration Ltd. is all about shale assets, and Exxon has been building up its own position in the U.S. side of the Bakken. Petronas's proposed $6-billion takeover of Progress Energy Resources is another high-profile acquisition of shale assets. Norway's Statoil ASA bought a foothold in Bakken just last year, with a $4.4-billion (U.S.) takeover of Texas-based Bingham Exploration Co.

And they've been paying substantial premiums for the privilege. Exxon and Statoil both offered about 35 per cent above the market price to win their acquisitions. Petronas's offer for Progress is 90 per cent above the market price.

A PetroBakken takeover would have been complicated, to say the least, as long as the company was tied up with Petrobank. But the spinoff removes that obstacle. With the divorce papers filed, don't be surprised if some deep-pocketed suitors come a-courting soon.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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