..from Cannacord Capital this morning.
STRONG BUY PanCanadian Petroleum (PCP : TSE : $44.50 : Issued 252.9M)
Gord Currie, CFA (403) 508-3805 gord_currie@canaccord.com
HIGHLIGHTS
* CP to distribute its 86% interest
* PanCanadian to pay a $4.50/share special dividend
Recommendation: STRONG BUY
12-month target price: $55.00
52-week price range: $46.50-19.50
Shares O/S: basic 252.9M
fully diluted 261.9M
Major shareholders: Canadian Pacific, 86%
Weekly trading volume: 380,000
Long-term debt: $912M
LTD/CF: 0.3
Net asset value/share: $28.89
P/NAVS: 1.4
Market capitalization: $11.2B
Sector: Oil and Gas
Web site address: www.pancanadian.ca
PanCanadian's parent company, CP Limited, has been thinking about
spinning off one of its subsidiaries for some time, and we were all
kept guessing as to which subsidiary it would be. Yesterday, CP
surprised us all by resolving to distribute the shares it owns if four
subsidiaries, retaining only the hotels. This is a very positive
development for PanCanadian, which will see its public float expand
from only $1.6 billion to $11.3 billion almost overnight. Large
investors, who used to have to buy CP to get exposure to PanCanadian,
will now be able to own PanCanadian directly.
Better still, PanCanadian is likely to accede to a recommendation from
CP, paying a $1.15 billion special dividend, or about $4.50/share.
Surprisingly, the stock gained only $0.50 yesterday, although it set a
new high of $46.50 before settling back. Maybe investors are
concerned about PanCanadian's ability to pay, or the impact on its
balance sheet. However, as we indicated in our Daily Letter comment
of December 8, 2000, the company is generating more cash flow than it
can spend. Its capital budget for 2001 is $1.5 billion but we
estimate that the company will generate as much as $3.0 billion in
cash flow. It had only $912 million in long-term debt at year-end, so
paying the special dividend would boost debt to $2.0 billion or about
eight months cash flow. The company will not be constrained from
developing recent discoveries in the Gulf of Mexico or on the East
Coast of Canada.
The added liquidity and the special dividend come as a welcome
surprise, and within the next two weeks PanCanadian is going to share
some details of its 100%-owned natural gas discovery at Deep Panuke on
the Scotian Shelf. Hopefully the company will provide an estimate of
reserves, an estimate of production, and a timetable for development.
If the numbers are large enough, that news should give the stock some
added lift.
If PanCanadian pays a dividend of $4.50 per share, an investor who
bought the stock at yesterday's closing price would effectively be
paying only $40.00 or nine times earnings for one of Canada's premiere
oil and gas companies. We think that the market's muted reaction
yesterday creates an outstanding opportunity to buy today. |
