Description

The investment idea is the Natural Gas Linked Subordinated Notes of Barrington Petroleum Ltd.These notes pay interest quarterly from a minimum of 6.5% to a maximum of 12%,depending on Alberta natural gas prices ranging between $2.00Cdn and $2.69Cdn per gigajoule.Since Alberta prices are currently about 5x the maximum level the 12%interest rate should be applicable for the forseeable future.In addition in contrast to debentures the accrued interest between payments goes to the buyer not the seller.As the next payment is Jan.31 the buyer is picking up over $2 in interest.Based on the $86 price the current cash yield is 14%.The sweetener for this idea is that Barrington Petroleum is currently in an auction process which began on November 27/00.Based on actual 9mo. results Barrington's book value after all liabilities would be $145.6mm almost 3x the $50mm principal amount of these notes.Barrington Pertroleum should cash flow approximately $35mm in 2000 or $0.58 per share fully diluted.The common shares trade for $0.95Cdn and there are 63.083mm fully diluted shares outstanding.I would expect the buyer of Barrington would want to redeem these notes quickly given the high interest cost.The maturity date on these notes is July 30,2003.Since a good credit could currently finance for about 7% there substantial incentive to refinance these notes sooner than later.In addition the buyer might have to pay a penalty to redeem these notes early as the company paid such a penalty on another note issue which it redeemed in 1999.Barrington Petroleum has a website at www.barrington.com.

Catalyst

Barrington Petroleum is in an auction process which should result in an investment upgrade on its debt and a likely early redemption.