Swizzled

I posted about Petrobakken a couple of days ago. The parent company which Myth referred to is the better investment. Buy a share of Petrobank today and you essentially pay for the market value of their shares in Petrobakken and Petrominerales (both of which I believe are considerably undervalued). So that alone is a pretty good investment. You get for free their Heavy Oil Business Unit which has over 700 million barrels of oil. And you also get the rights to THAI which I'm sure most of you have heard of. My note below recaps the Q3 conference call. I was honestly not expecting THAI to be worth much to make this a very good investment. I was shocked to hear how much progress they have made with the technology as it appears they are already producing at commercial levels and have two international oil companies ready to sign up to use it before year end. Please be critical and let me know what you think. Given the safety net of the two very solid and valuable subsidiaries (as well as another 700 million BOE of heavy oil) to protect you on the downside I think this is an incredibly attractive chance to get a free ride on a technology that could be worth billions. http://www.gurufocus.com/news.php?id=114412

A little unusual. They wrote in the WSJ warning of QE2 and the likely outcome of dollar weakness and inflation. Considering some of the names on the list, the warning is worth listening to. When I hear weak US dollar and inflation I immediately think of oil as protection. Given the supply/demand situation over the next decade it looks even better. Here is their letter http://valueinvestorcanada.blogspot.com/2010/11/seth-klarman-and-others-write-to.html

"Now, I know longleaf has done way, way more research than I've done, but doesn't all this raise more than just a red flag?" CEO Aubrey is what makes this interesting. Both good and bad really. In the fall of 2008 when the world was falling apart and stocks dropping to prices that were unimaginable a year earlier Aubrey lost all of his CHK holdings through margin calls. It seems he was on margin to buy hundreds of millions of dollars of CHK in addition to his huge stake from being a co-founder of the company. So two parts to this. 1) He is an idiot to use margin and got caught out in a 1 in 50 year financial mess 2) He really, really believes in CHK to be out margining up to gain even more exposure. He is a salesman and some of the payments the BOD have granted him are controversial. He is also an exceptional land man and amassed an incredible asset base before anyone else had the vision to do it. The majors are now coming to him to buy property. He is part of the reason I'm not already a large shareholder as I question his judgement in margining up personally. He is also part of the reason I'm so interested in becoming a shareholder. http://valueinvestorcanada.blogspot.com/

I think you are likely correct and that there won't be recognition of these assets until the production ramps up. CHK would obviously also do very well if natural gas prices went up. The thing about the production ramp is that there is virtually no risk that it won't happen. What really amazes me is something like the transaction below is completely ignored by the stock market. CHK didn't even enter the Eagle Ford until last fall, went in and amassed a position spending $1.4 billion. Now they just sold a 33% interest in this play for $2.2 billion. So they keep 67% of the play. Have the value set by the transaction as being about $4.4 billion for what they retain. And what they are left with actually cost them a negative $800mil. And the stock market yawns. That is something like $7 per share in value created on a $22 stock in a few months and the stock doesn't budge. http://valueinvestorcanada.blogspot.com/ "First, it creates value. The latest example is the Eagle Ford Shale. CHK was a late entrant with first leases acquired in 11/09, reached 300,000 net acres by 3/10, reached 625,000 net acres by 10/10, invested $1.4 billion, have agreed to sell 200,000 net acres for $2.2 billion, leaving 425,000 net acres and 2.3 billion Boe possible to CHK at a negative cost of $800 mm. What value did this create? We think $7-10 billion."

I've listened to Aubrey now for several quarters talking about how significant the position is that CHK has established in unconventional oil plays. I watched what he did with natural gas land accumulation, and I don't doubt that if he is saying they are doing something big on the oil front that they in fact are. Until now I've resisted the urge to make CHK a sizable position. As the drum beat grows louder (via production ramping up) from these plays it is getting harder to ignore. Here is Mark Papa of EOG on the significance of what is happening. He is pretty well respected as being a straight shooter. CHK has the biggest positions in the best plays. It is a little late on a Saturday, but I think I'll start building a position on Monday knowing it is going to take production ramping up to have this reflected in the share price. http://valueinvestorcanada.blogspot.com/2010/11/mark-papa-says-shale-plays-have-altered.html

I've been following their holding in CHK for a long time and have been following CHK directly for even longer. I'm very close to making CHK a core position as I've seen at least a dozen transactions in 2010 that validate a value per share for CHK of more than 2x the current stock price. I've written a few times on the company (below). Was wondering if anyone else had any thoughts. http://valueinvestorcanada.blogspot.com/search/label/CHK