Arch Coal – Still Down and Dirty ; Peabody Sees Rebound

Arch Coal Inc. (ACI) reported a narrower third-quarter loss and better-than-expected sales figures as it continues to cut costs in the face of slumping prices for the power plant and steelmaking fuel.

The net loss narrowed to $97.2 million, or 46 cents a share, from $128.4 million, or 61 cents, a year earlier, the St. Louis-based company said in statement today. Quarterly sales beat estimates as Arch increased output from western mines because of improved rail service.

Arch hasn’t turned a quarterly adjusted profit since 2011 amid coal’s worst downturn in decades. Faced with a six-year low for the price of metallurgical coal, Arch idled its Cumberland River complex in Central Appalachia in July. There’s a global surplus of the steelmaking ingredient after a slowdown in Chinese demand.

“We are further reducing our expectations for corporate administrative expense and capital spending in 2014, and expect to end the year with approximately $1 billion in cash and short-term investments,” John T. Drexler, Arch’s chief financial officer, said in the statement. “This strong liquidity position, coupled with no debt maturities until mid-2018, provides Arch with the financial flexibility needed to navigate current coal market conditions.”

‘No Surprises’

Other coal producers, including James River Coal Co. and Patriot Coal Corp., have filed for bankruptcy in the past two years as North American natural gas output soared, causing prices to drop to 12-year lows. Coupled with more stringent pollution measures, utilities are burning less coal to generate electricity.

The company reported $742.2 million in revenue, more than the $722.9 million average estimate and less than the $791.3 million it made during the same period last year.

“Overall, we see no surprises in the print, the company continues to hoard liquidity and aggressively cut costs,” Daniel Scott, a New York-based analyst for Cowen & Co., wrote in a note to clients today.

Arch climbed 9.5 percent to $1.96 at 10:54 a.m. in New York. The shares have declined 56 percent this year.

Excluding one-time items, the loss was 45 cents a share, exceeding the 41-cent average of 18 analysts’ estimates compiled by Bloomberg.

Other U.S. coal producers rose today. Walter Energy Inc. advanced as much as 11 percent before ending 1.3 percent higher, while Peabody Energy Corp. closed 1.8 percent higher. Alpha Natural Resources Inc. increased as much as 9.4 percent before closing 3.5 percent lower.

Investors see that the worst may be over for the coal market after a series of output cuts around the world

- said the chairman and chief executive officer of Peabody Energy Corp. (BTU), the largest U.S. producer.

“We’ve had essentially flat pricing now for about nine months,” Greg Boyce said in an Oct. 24 phone interview. “All of the investors are encouraged that that represents kind of a bottom to the commodities cycle, but they’re waiting to see what happens in terms of the timing of that uptick.”

Peabody and most of its publicly traded domestic competitors have posted losses amid the worst slump in the coal industry in decades. The price of metallurgical coal used in steelmaking has fallen to a six-year low because of slowing Chinese growth. Thermal coal used to generate electricity has also dropped on tighter emissions regulations and competition from cheap natural gas.

Shares of Peabody have fallen more than 9 percent since the start of trading on Oct. 20, when it reported a third-quarter loss of 56 cents a share. Boyce said Peabody’s stock declined because investors haven’t yet seen evidence that the global oversupply of coal is abating.

Peabody scaled back output of steelmaking coal at its Burton Mine in Australia this year. Glencore Plc and Walter Energy Inc. are among other producers that have made reductions. There have been 30 million tons of metallurgical-coal cutbacks announced globally this year, Boyce said in an Oct. 20 statement.

Rebound ‘Inevitable’

Investors will spend the next couple of quarters looking for signs of a recovery in coal prices, Boyce said. Given the industry’s reduction in new capital investments, a rebound is “inevitable,” he said.

“There’s going to be a long lag where you’ve got less supply than demand,” he said. “That’s going to have a strong, strong pull for the sector.”

Catalysts that coal investors are looking for include rising Chinese demand and an improvement in U.S. railroad capacity to deliver from mining regions such as Wyoming’s Powder River Basin, he said. Peabody, which produces most of its thermal coal in the PRB, said last week rail bottlenecks there are limiting its sales.

Boyce said Peabody will be “very well positioned” when the coal cycle does eventually turn. He doesn’t expect the company to buy up competitors or low-priced mining assets until coal prices start to rebound, he said.

“Right now, there are no tier-one assets on the market, because the people that have them, they’re not interested in selling at the bottom of the cycle,” he said.

 

Oil Enters Bear Market

Brent Falls to Lowest Since 2010 After IEA Cuts Forecast

Brent crude fell to the lowest level in almost four years after the International Energy Agency said oil demand will expand this year at the slowest pace since 2009. West Texas Intermediate slipped for the fifth time in six days.

Futures dropped as much as 3.1 percent in London and 2.1 percent in New York. Oil consumption will rise by about 650,000 barrels a day this year, 250,000 fewer than the prior estimate, the Paris-based agency said in its monthly market report. U.S. crude supplies probably grew by 2.5 million barrels last week, according to a Bloomberg survey of analysts before a report from the Energy Information Administration on Oct. 16.

Oil futures have collapsed into bear markets as shale supplies boost U.S. output to the most in almost 30 years and global demand weakens. The biggest producers in the Organization of Petroleum Exporting Countries are responding by cutting prices, sparking speculation that they will compete for market share rather than trim output. Saudi Arabia won’t alter its supplies much between now and the end of the year, a person familiar with its oil policy said on Oct. 3.

“The IEA report is killing Brent,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “This is the fourth month in a row where they’ve cut their demand forecast. There’s tremendous downside risk for the market.”

Fourth Month

Brent for November settlement declined $2.54, or 2.9 percent, to $86.35 a barrel on the London-based ICE Futures Europe exchange at 10:24 a.m. in New York. It slipped to $86.17, the lowest intraday price since Dec. 1, 2010. The volume of all futures traded was 68 percent above the 100-day average for the time of day. Prices have decreased 22 percent this year.

WTI for November delivery dropped $1.71, or 2 percent, to $84.03 a barrel on the New York Mercantile Exchange. The contract settled at $85.74 yesterday, the lowest close since December 2012. Volume was 72 percent higher than the 100-day average. The U.S. benchmark grade traded at a $1.96 discount to Brent, down from $3.15 at yesterday’s close.

The IEA reduced its estimate for demand growth this year for the fourth month in a row, meaning oil consumption will expand by about half the rate of 1.3 million barrels a day anticipated in June. The IEA cut its 2015 demand growth forecast by 100,000 barrels a day to 1.1 million. About 200,000 barrels a day less crude will be needed from OPEC this year and next than estimated previously, the agency said.

Market Share

OPEC, which supplies about 40 percent of the world’s crude, is raising output as its members compete for market share while seeking to meet increased domestic demand. The group pumped 30.935 million barrels a day in September, the most since August 2013, according to a Bloomberg survey. The gain was led by Libya, where output climbed by 280,000 barrels a day to 780,000, the fifth straight increase.

“The recovery in Libyan oil production has pushed up total OPEC output at a time when demand growth is slowing,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. “OPEC has a serious problem.”

Iraq said on Oct. 12 that it will sell its Basrah Light crude to Asia at the biggest discount since January 2009, following cuts by Saudi Arabia and Iran. Middle East producers almost always follow the lead of Saudi Arabia, OPEC’s largest member when setting export prices. The Saudis need to deepen price cuts for Asia by between 70 cents and $1 a barrel to restore a competitive position against other Middle Eastern and West African suppliers, according to JPMorgan Chase & Co.

Divergent Views

Oil ministers from Kuwait and Algeria have dismissed possible output cuts as the price slump prompted Venezuela to call for an emergency OPEC meeting. The group is scheduled to gather on Nov. 27 in Vienna.

The EIA, the Energy Department’s statistical arm, will release its weekly petroleum inventory report on Oct. 16 at 11 a.m. in Washington, a day later than usual because of yesterday’s Columbus Day holiday. Crude supplies rose 5.02 million barrels to 361.7 million in the week ended Oct. 3, the biggest increase since April, EIA data showed.

“The market isn’t expected to get any relief from Thursday’s inventory numbers,” Yawger said. “We’re looking for it to show a substantial build in crude supplies, coming on top of a 5 million-barrel build the previous week. There’s plenty of crude on hand.”

The report will probably show that gasoline stockpiles dropped by 1.55 million barrels in the week ended Oct. 10, according to the median estimate in the Bloomberg survey of eight analysts. Inventories of distillate fuel, a category that includes diesel and heating oil, are projected to have slipped by 1.65 million barrels.

Fuel Prices

Bankers’ Petroleum

 

COMPANY DESCRIPTION:

Bankers’ operations are focused on developing heavy oil assets in Albania, which include rights to develop the Patos-Marinza and Kuçova heavy oil fields (both 100% interest) during the 25-year licence period. Bankers has an opportunity to unlock immense potential from its 5.4 billion barrels oil-in-place Patos-Marinza field by applying modern techniques to optimize recovery factors, expand its resource base, and increase production.

All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production CHANGING TIDES IN THE MARKET;

RAISING TARGET PRICE

Investment recommendation Following Bankers’ most recent marketing tour, we believe investor sentiment continues to strengthen. In our view, the shift is attributable to several quarters of solid production growth, a positive reserve update and the company’s consistency in meeting production guidance. We also believe that the market has generally become more receptive to international investments and to Bankers’ story in particular.
Investment highlights

In our view, the markets have become more receptive to the risk associated with international E&Ps.
 Given the decline in Brent prices over the last couple of weeks, we believe Bankers’ strong share price performance relates to ongoing marketing efforts by the company.
Valuation We are maintaining our BUY recommendation and increasing our target price from C$6.00 to C$7.25/share.

Our revised target now accounts for 80% of the risked upside in our model. We maintain our view that there will always be some apprehension toward Albania-based investments, which may prevent full recognition of upside potential. At current prices, we project a potential return to target of ~30%.
Risks In additional to general commodity risk, we believe Bankers is subject to country risk associated with its Albania operations. While the company has increased efforts to improve netbacks, we believe potential large- scale enhanced recovery efforts

Oil Bear Market

OPEC’s Biggest Supply Boost Since ’11 Spurs Bear Market

OPEC increased oil production by the most in almost three years, helping to drive prices toward a bear market. Iran and Saudi Arabia offered their oil at the deepest discounts since 2008, adding to speculation that members of the group are competing for market share.

The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world’s oil, increased output by 402,000 barrels a day in September to 30.47 million, the group’s Vienna-based secretariat said in a monthly report. Iran matched Saudi Arabia yesterday by cutting the price of its main export grade to Asia by $1 a barrel, according to two people with knowledge of the pricing decision.

Brent futures, the international benchmark, traded at a four-year low today. Saudi Arabia told OPEC it raised output 11 percent last month, adding to speculation it will seek to preserve its share of export markets. Crude production is mounting in the U.S., Russia and Libya, while the pace of demand growth is lower as the economy slows in China, the world’s second-largest oil consumer.

“It’s a fight for market share out there at the moment,” Ole Sloth Hansen, an analyst at Saxo Bank A/S, said by e-mail today. “OPEC will have to come up with something otherwise the market will view it as a free invitation to carry on selling.”

Libyan Return

OPEC production last month climbed by the most since November 2011 and was the highest in more than a year, the group’s data show. Libya bolstered supplies by 250,600 barrels a day to 787,000 and Iraq added 134,500 to 3.164 million, according to secondary sources cited by the report. That more than compensated for an estimated drop of 50,400 barrels a day in Saudi output to 9.605 million.

Saudi Arabia’s own communications to the group showed an increase of 107,100 barrels a day to 9.704 million in September, according to separate data in the report.

Price cuts announced last week by Saudi Arabia, matched by Iran yesterday, fueled speculation it may let oil fall rather than cut production and cede market share. OPEC members in West Africa are also showing signs of greater competition, said Julian Lee, an oil strategist at Bloomberg First Word in London. Nigerian sales of crude for November have been slower than usual after Angola moved more quickly to reduce prices, he said.

Saudi Pressure

Brent for November settlement slid to $88.11 a barrel on the London-based ICE Futures Europe exchange today, the lowest in almost four years. West Texas Intermediate, the U.S. benchmark, dropped as low as $83.33 a barrel on the New York Mercantile Exchange, the least since July 3, 2012.

OPEC’s September production increase contributed to the fall of more than 20 percent in both grades from their June peaks, said Saxo Bank’s Hansen. A drop of that size meets a common definition of a bear market.

“Saudi Arabia is leaning back a bit to force better co-operation” from other members on production cuts, Thina Saltvedt, an analyst at Oslo-based Nordea Markets, said by phone. “The demand side is getting weaker and weaker. It doesn’t look good if OPEC isn’t willing to tighten things up.”

OPEC’s output in September was about 300,000 barrels a day higher than the daily average of 30.2 million the group expects is needed in the fourth quarter. Its 12 members will probably cut either their output or formal production target of 30 million barrels a day when they next meet on Nov. 27 in Vienna, said 11 of 20 analysts surveyed by Bloomberg News yesterday. Estimates ranged from a reduction of 500,000 to 1 million barrels a day.

The organization kept unchanged annual forecasts for global oil demand, and the amount of crude OPEC will need to provide, for this year and next.

“The recovery in gasoil consumption for industry and transportation use, along with emerging winter demand” will support the market in coming months, it said.

WTI Oil Seen Falling – Continuing Downward Trend

West Texas Intermediate crude is poised to extend its slump below $90 as consumption slows and supplies climb from the U.S. and Libya

, according to the most accurate forecaster of prices of the grade in the second quarter.

Crude is under pressure because of signs of easing demand in emerging markets, said Jason Kenney, an equity analyst at Banco Santander SA. Prices are also falling because of “comfortable supply” as U.S. shale oil production booms and Libyan crude output rebounds, he said. WTI fell below $90 a barrel today for the first time in 17 months, extending this year’s decline to 9.9 percent.

Surging output from shale deposits has turned the U.S. into the world’s largest producer of liquid petroleum, cutting its need for imports just as the pace of global demand is slowing. U.S. crude output rose to the most since 1986 last month, while OPEC pumped at the highest level in a year.

“I think it’s reasonable to stay cautious rather than bullish on oil prices,” Kenney said in a phone interview from Edinburgh. “The challenge in oil pricing globally at the minute is weak consumption trends across northeast Asia and also in the Middle East and Latin America.”

WTI will average $97.50 a barrel this year, dropping to $86 in 2015, according to Santander. The U.S. benchmark traded $2.06 lower at $88.67 a barrel on the New York Mercantile Exchange at 11:47 a.m. London time. Brent crude, the European benchmark, fell 20 percent from its June peak to trade at $92.24 a barrel today on London’s ICE Futures Europe exchange.

Demand Trend

“The global oil demand trend showed clear signs of weakening” last quarter, as demand growth from the same period a year earlier fell to 480,000 barrels a day, the lowest in two and a half years, according to a Sept. 11 report from the International Energy Agency in Paris. The adviser to 29 industrialized nations also trimmed its demand forecast for next year to 93.8 million barrels a day because of a “weaker outlook for Europe and China.”

The Organization of Petroleum Exporting Countries probably won’t react immediately to the oil price slump by reducing production because “they can probably withstand Brent prices between $80 to $85,” Kenney said.

OPEC output increased by 413,000 barrels a day to 30.935 million in September as Libyan production rebounded to the highest level in more than a year, according to a Bloomberg survey.

Saudi Arabia yesterday dropped its official selling price for crude oil to Asia to the lowest level since 2008 amid speculation it was seeking to gain market share in the fastest-growing region for petroleum demand.

Bloomberg ranked energy forecasters based on the accuracy of their predictions for the most recent eight quarters ending on June 30, 2014. Kenney’s average margin of error of 4.11 percent was the lowest.

Bellatrix Exploration Ltd. BUY Target Price $14

BXE : TSX : C$6.88
BXE : NYSE
BUY 
Target: C$14.00

COMPANY DESCRIPTION:
Bellatrix Exploration is an intermediate sized exploration
and production company with operations in Western
Canada primarily focused on multi-zone opportunities in
west central Alberta.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
ADDITIONAL JV FUNDING BUT NOT SPENDING UNTIL 2016
Investment recommendation
Bellatrix announced another Joint Venture transaction with its existing
partner Grafton for $250 million. We view the announcement positively
in the context that it 1) reconfirms BXE’s existing JV partner is content
with its partnership and looking to expand the relationship, 2) provides
additional promoted capital with which to anchor production and cash
flow growth in 2016 through 2018, and 3) although pro-rata terms were
similar to its prior JV transactions, the working interest reduction in this
deal provides higher working interest volumes (net to BXE) from this
future well stream, which we believe fits better into its future growth
and infrastructure plans. Our BUY recommendation and C$14.00 target
are unchanged based on 1.0x NAV 6.0x 2015E EV/DACF.
Investment highlights
Earn in terms similar to previous JV transaction with Grafton. The
announced before payout earn in terms of this transaction (50% to earn
33%) are essentially in line with its previous terms (82% to earn 54%).
Additionally, the overriding royalty option (10.67%) in relation to the
33% before payout is essentially the same as the 17.5% on 54%. On a
first-year basis, we see a ~34% capital efficiency improvement from its
wells using JV promoted capital.
Partner spend bolsters the long-term plan but no impact to our financial
forecasts. Given the capital is planned for 2016+, we have made no
adjustments to our estimates at this time. However, in our view, the JV
provides further promoted capital that should help bolster growth upon
expected completion of its Phase 1 and 2 gas plant projects.

Valuation

Bellatrix trades at a 0.5x multiple to NAV, 3.6x EV/DACF, and $35,100
per BOEPD based on our 2015 estimates; a substantial discount to its
peer group at 0.8x NAV, 7.1x EV/DACF, and $68,400/BOEPD.

Encana Corporation Update

ECA : NYSE : US$21.59
ECA : TSX
HOLD 
Target: US$25.00 

Energy — Oil and Gas, Exploration and Production
FRIDAY NIGHT LIGHTS
We maintain our HOLD rating but raise our target to $25 (from $24) post
ECA’s announced planned acquisition of Athlon Energy (ATHL : NASDAQ :
$58.32 | HOLD, covered by Eli Kantor). We applaud ECA for a high-quality
entry into a premier U.S. oil play; one that has multi-zone upside potential.
However, we do believe there are some key questions that need to be
addressed over time:
1. Are the 50 MBOE/d 2015 average and 200-250 MBOE/d by 2019 targets
achievable? Yes, in our view; but it will require improvements in drill
times. Prior to ECA’s announcement, Canaccord Genuity estimated 2015
production for ATHL to be 41 MBOE/d. Now this assumes about $965
million of capex and 6 rigs by year-end. Nevertheless, even when
assuming the 7 rigs by year-end 2015 that ECA plans to go to, we are
still short ~5 MBOE/d of ECA’s 50 MBOE/d target for the year. With
respect to the longer-term target, assuming 7 rigs per year still gets us
to only about 140 MBOE/d average for 2019. The aforementioned
assume a spud to rig release timing of 27 days. Therefore, reducing it to
15 days, which is in line with what Pioneer Natural Resources (PXD :
NYSE : $201.96 | HOLD, covered by Eli Kantor) is targeting, yields ECA’s
targets. However, there is one other potential bottleneck for the outer
years, and that is infrastructure (i.e. plants) to handle the increased
production capacity that ECA is targeting as well as potential cost
inflation/capacity constraints due to increased services competition.
2. Did the company pay up for the asset? Yes, to an extent. As shown in
Figure 1, the transaction is about 20% dilutive on an EV/DACF basis.
Even when assuming 50 MBOE/d of production in 2015 for ATHL, it is
still 15% dilutive. However, there is some accretion on an NPV basis
when assuming over 5,000 hz locations (vs. the 1,850 locations ATHL
assumes which looks conservative as we discuss later in this note),
hence our target increase. Also it used high priced PrairieSky paper to
help fund the acquisition.
3. Will ECA be successful in retaining ATHL employees? Only time will tell
on this one. If the ATHL management team sets up a new company,
there is risk of departures, albeit limited in the near-term by any
potential non-competes imposed on top management of ATHL

Bellatrix Exploration Ltd Update BUY Target Price $ 14

BXE : TSX : C$7.55
BXE : NYSE
BUY 
Target: C$14.00

COMPANY DESCRIPTION:
Bellatrix Exploration is an intermediate sized exploration
and production company with operations in Western
Canada primarily focused on multi-zone opportunities in
west central Alberta.
All amounts in C$ unless otherwise noted.

Third Party  CONSTRAINTS
Energy — Oil and Gas, Exploration and Production

Investment recommendation
Bellatrix provided a brief operational update in which it highlighted two
unexpected plant turnarounds anticipated to impact corporate
production in late September. Although disappointing from a near-term
perspective; the continued effect from third-party facility impacts clearly
supports the company’s decision to construct its deep cut plant at Alder
Flats in 2015. We have revised our near-term production estimates
modestly to reflect the expected downtime in September and have taken
a slightly more cautious view in 2015. Given the reduced forecast, we
have modestly trimmed our target to C$14.00 and maintain a BUY
rating. Our fundamental view on the stock remains unchanged and with
a forecast 85% return to target, we see significant upside potential in the
stock. Our target price is based on 0.9x NAV and a 6.0x 2015E EV/DACF
multiple.
Investment highlights
Q3/14 volumes slightly lower. BXE has guided towards a Q3/14 average
of ~40.5 mboe/d, versus previous expectations in the 41.5 mboe/d
range. Our revised forecasts capture this update and maintain an
outlook where BXE reaches 48,000 boe/d by year end, which is
contingent on tie-ins to third-party facilities expected in Nov/Dec.
Stock significantly oversold at current levels. Since May 7, the stock has
underperformed the Energy Index by ~36%, largely as a result of
temporary operational challenges. At current strip pricing and even
assuming a downside case where production volumes average 5% below
our forecasts, implied valuation remains extremely compelling at 4.4x.
Valuation
Bellatrix trades at a 0.5x multiple to NAV, 3.6x EV/DACF, and $35,100
per BOEPD based on our 2015 estimates; a substantial discount to its peer group at 0.8x NAV, 7.1x EV/DACF, and $68,400/BOEPD.

Continental Resources BUY

CLR : NYSE : US$72.88
BUY 
Target: US$92.00

COMPANY DESCRIPTION:
Continental Resources is a U.S. exploration and
production company with operations in the Williston
Basin (ND & MT) and the SCOOP play (OK). CLR is
headquartered in Oklahoma City, OK.
Energy — Oil and Gas, Exploration and Production
A LARGE SERVING OF THE WB WITH A “SCOOP” ON TOP; INITIATE WITH BUY
Investment recommendation
CLR is the largest leaseholder in the Williston Basin (WB) with 1.2 million
net acres and is also an industry leader in downspace and enhanced
completions testing in the play. Successful downspacing can add
meaningful value for shareholders, as could increased EURs from
improved completion techniques. Additional upside could come from the
development of the SCOOP in Oklahoma, where the company is the
largest leaseholder and producer in the play. CLR’s upcoming analyst day
could provide meaningful catalysts on all fronts. We initiate coverage with
a BUY rating and $92 price target.
Investment highlights
 Continued success in WB downspacing can add further upside to
NAV. CLR will conduct three more 660 foot (160-acres) density tests
this year, the results of which could serve as major catalysts when
released, likely by year’s end. Its first such test in McKenzie County
posted strong IP rates in the Bakken and the Three Forks (TF)
benches. These next three pads will target other areas of the WB.
 We feel enhanced completions techniques, including the use of
slickwater fracs and increased proppant volumes, should have a
positive impact on EURs going forward. CLR’s latest wells employing
these techniques have solidly outperformed offset wells. It plans more
enhanced completions at its next high-density pads.
 We believe the SCOOP will continue to grow at very robust rates
(~50% Y/Y in 2015E) and thereby bolster CLR’s oil/condensate
volumes in the coming years. The testing of extended and stacked
laterals are positive steps, in our view, towards adding further upside
to its already solid position in that play.
 The company is on very solid ground with regard to liquidity, in our
view. Combined with internal cash flow generation, CLR should have
more than ample capital to fund WB and SCOOP development.
Valuation
Our $92 price target is based on a 10% discount to a ~$103 NAV

Whiting Petroleum

WLL : NYSE : US$83.53
BUY 
Target: US$108.00
COMPANY DESCRIPTION:
Whiting Petroleum engages in the acquisition,
development, exploitation, exploration, and production of
oil and gas properties. The company primarily focuses in
the Permian Basin, Rocky Mountains, Mid-Continent, Gulf
Coast, and Michigan regions of the United States.

Energy — Oil and Gas, Exploration and Production
POISED TO UNLOCK EVEN MORE OF THE WB & NIOBRARA; INITIATE BUY
Investment recommendation
We believe WLL has substantial upside given its ~845K net acres (pro
forma) in the core of the Williston Basin (WB), which can be further
exploited via downspacing and enhanced completion techniques. The
pending acquisition of KOG bolsters its inventory in the core of the WB.
Strong production growth in the Niobrara excites us as well. WLL trades
at a discount to its peers that we consider unwarranted. In our view,
continued solid execution will result in a narrowing of the valuation gap.
Thus, we initiate coverage with a BUY rating and $108 target.
Investment highlights
 WLL is testing enhanced completion techniques in its latest
Bakken/Three Forks (TF) wells; if successful, we believe they can
add meaningful upside to EURs and rates of return. Additional tests
of slickwater fracs and coiled tubing completions are planned for
this year. Cemented liner/plug & perf completions have already
yielded a 23% improvement in EURs at little incremental cost.
 The pending acquisition of KOG would enhance WLL’s inventory in
some of the best areas of the WB. The combined entity would have
>3,400 net future drilling locations. WLL plans to up the rig count to
26 by the end of 2015. It also intends to lower KOG’s average well
costs to $8.5M from $9.2M, which we consider very achievable. The
deal should be accretive on all relevant metrics starting next year.
 We foresee rapid production growth in the Niobrara (~2.5x y/y
growth in 2015E). At its Redtail acreage, it is testing tighter spacing
in the B bench and also wells in the C bench; results from its 32-
well Horsetail Pad should come in January. Success there could
double its Redtail inventory to ~3,300 net locations from ~1,650.
 The company should have ample liquidity to fund continued drilling
efforts in the WB and Niobrara. Even with the assumption of KOG’s
~$2.3B of debt, the balance sheet remains in solid shape.
Valuation
Our $108 price target represents a 10% discount to a ~$120 NAV

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