Encana Corporation Update

ECA : NYSE : US$21.59
Target: US$25.00 

Energy — Oil and Gas, Exploration and Production
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

Continental Resources BUY

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

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
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.
Our $92 price target is based on a 10% discount to a ~$103 NAV

Bulls Fleeing Natural Gas

Bulls Fleeing Natural Gas as Goldman Sees Further Decline
Speculators are fleeing natural gas after prices dropped below $4 for the first time since December and power plant production fell to a 13-year seasonal low.

Hedge funds reduced net-long positions, or bets on rising prices, by 11 percent in the week ended July 22, the U.S. Commodity Futures Trading Commission said. Bullish wagers have declined 51 percent since February.

Futures slid as the output from electricity generators, the biggest consumers of the fuel, fell 11 percent in the week ended July 19 from a year earlier to the least for the period since 2001, according to the Edison Electric Institute. Mild weather and a record pace of inventory gains may push prices lower in the next three months, Goldman Sachs Group Inc. said.

“The move down in prices this early in the summer is surprising,” Breanne Dougherty, a natural gas analyst at Societe General SA in New York, said in a phone interview on July 25. “The power generation load makes and breaks summers and it’s extremely sensitive to weather.”

Natural gas dropped 7.9 percent to $3.772 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. The contract for August delivery closed at $3.781 on July 25, capping a sixth weekly decline, the longest stretch of losses since the first quarter of 2010. It was at $3.771 in electronic trading today.

Gas Supply

Gas inventories, which declined to an 11-year low in late March, have rebounded at the fastest pace since 2001, U.S. Energy Information Administration data show.

Stockpiles rose by 90 billion cubic feet to 2.219 trillion in the week ended July 18, a gain bigger than the five-year average for the 14th straight week, according to the EIA.

“While we previously believed that risks to 2014 prices were skewed to the upside, we now see downside risks to U.S. gas prices in the next three months,” Daniel Quigley, a Goldman analyst in London, said in a note on July 22.

Power generation in the lower 48 states totaled 82,614 gigawatt-hours in the seven days ended July 19, the least since the week ended June 13, Edison Electric data show.

This month has been the coolest July since 2009, Matt Rogers, the president of Commodity Weather Group LLC in Bethesda, Maryland, said in an e-mail on July 25. “We’re expecting the cool pattern to continue into August.”

Power Plants

Gas deliveries to power plants dropped 13 percent this month to average 25.9 billion cubic feet a day as of July 25, the lowest for the period since 2009, according to LCI Energy Insight in El Paso, Texas.

Futures may find support between $3.50 and $3.75 for the rest of the stockpiling season, with those prices prompting power plants to switch from coal, Teri Viswanath, the director of commodities strategy at BNP Paribas SA in New York, said by phone on July 24.

“The problem with the emergence of this cool fall-like weather is that we don’t expect to see a slowdown in those inventory injections until the reemergence of heating demand,” she said.

In other markets, the downing of a civilian airplane in Ukraine and crude stockpiles at Cushing, Oklahoma, at a six-year low enticed speculators back to the oil market, boosting bullish bets from a six-month low.

Money managers raised net-long positions in benchmark West Texas Intermediate futures by 7.3 percent to 278,116 futures and options combined in the week ended July 22, CFTC data show. Long positions rose 1.1 percent 307,739 while shorts dropped 35 percent to 29,623.

WTI Jump

WTI futures advanced 4.5 percent to $104.42 a barrel on the Nymex in the period covered by the report. The contract closed at $102.09 on July 25.

Net long gasoline bets fell 22 percent to 34,115. Futures slipped 0.6 percent to $2.8807 a gallon on the Nymex in the week covered by the report and settled at $2.8653 on July 25.

Gasoline at U.S. pumps, averaged nationwide, slid 0.7 cent to $3.543 a gallon on July 24, the lowest since March 28, according to data from Heathrow, Florida-based AAA, the nation’s largest motoring group. Retail prices are down 4.1 percent from a 13-month high on April 26.

Money managers’ bets on ultra-low sulfur diesel flipped to a net short position for the first time since November with 1,520 contracts, the CFTC report showed. Futures fell 0.1 percent to $2.8542 a gallon in the report week and closed at $2.9157 on July 25.

Natural Gas

Net-long positions on four U.S. natural gas contracts declined by 25,772 futures equivalents to 201,090, the least since Dec. 3.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Long positions fell by 4 percent to 472,613, the least since February 2013. Bearish bets gained 2.3 percent to 271,523, the most since Dec. 10.

“I wouldn’t expect prices to go much lower,” said Societe Generale’s Dougherty. “That said, if we continue to get extremely mild weather as we saw in July through October, we will see a slightly different story.”

Penn Virginia Corporation OVERSOLD, REITERATE BUY

PVA : NYSE : US$14.78
Target: US$20.00

Energy — Oil and Gas, Exploration and Production
Investment recommendation
PVA has been successfully transitioning to a liquids-focused company
while retaining its leverage to an improvement in natural gas prices.
The company has built a sizeable ~87K net acre position in the volatile
oil window of the Eagle Ford (EF) and has generated solid results with
the drillbit while bringing costs down at the same time. We remain
buyers, especially after the recent correction in the stock.
Investment highlights
 PVA announced that it has entered into a definitive agreement to
sell its Mississippi assets to an undisclosed buyer for gross cash
proceeds of $72.7M. The sale is expected to close next month. Our
expectations were that the company would get something closer to
PV-10 for these assets, which was ~$55M at YE 2013, and are
therefore pleased with the $72.7M price tag. Further liquidity
enhancing asset sale announcements should be forthcoming shortly.
 The stock sold off for two days (before rebounding yesterday) over
concerns about the company’s EF EURs. EURs have not gone down;
PVA is now showing both its internal estimates, which it recently
raised, and its reserve engineer’s EURs, which are more
 As a reminder, PVA recently upped its EF inventory by 34% (now
1,510 gross locations, up from 1,125) as it is now including the
Upper EF as a distinct horizon (475 gross locations)

Painted Pony – Update/ NR

Painted Pony Petroleum (PPY-TSE)

Proving out the plan, on route to 20,500 boe/d in 2015 Investment highlights:

Painted Pony released Q1 results yesterday that were largely in line with expectations. More importantly the release contained a positive operational update that left us with three key takeaways:
1. The recent step change in Montney well rates
resulting from a switch in completion methods
is not only continuing, it appears to be getting
even better.
2. PPY appears well on pace to reach its 2015
production target of 20,500 boe/d in 2015
(annual average), in our view. This represents
an increase in production per share of ~55%
this year and another ~55% per share in 2015.
3. On our updated numbers PPY is no longer
expensive on cash flow multiples; in fact, it is
trading at a discount to its peers, despite the
growth profile, and extensive running room in
the Montney. Historically PPY has traded at
~15x EV/DACF, but on our increased
estimates it is now trading at just 6.5x 2015E
EV/DACF versus its gas weighted peers at
In our view, the above highlights are significant developments for Painted Pony. Despite the strength in PPY’s share price in recent months, we believe the stock is poised to move
significantly higher, as the company continues to execute on its aggressive growth plan. Painted Pony remains our  favorite pick in the natural gas space.

Penn Virginia Corporation

PVA : NYSE : US$14.76

Target: US$20.00

Investment recommendation
PVA has been successfully transitioning to a liquids-focused company
while retaining its leverage to an improvement in natural gas prices.
The company has built a sizeable ~86K net acre position in the volatile
oil window of the Eagle Ford (EF) and has generated solid results with
the drillbit while bringing costs down at the same time. We would be
buyers, especially after yesterday’s sell off.
Investment highlights
 In the EF, the company completed 16 (12.9 net) operated wells and
two (0.9 net) non-operated wells. EF production was 15.2 MBoe/d in
Q1, up 15% Q/Q, despite many completions coming later than
expected. PVA also increased its EF acreage to 85.9K, up 6.4K net
acres from last quarter and acquired at an attractive ~$3,000/acre.
 The Upper EF test yielded very solid results. The Welhausen #A2H,
drilled with a ~6,000 foot lateral and 26 frac stages, came on at a
peak gross IP rate of 2,165 Boe/d. Notably, this rate was higher
than the 1,767 Boe/d Devon posted in its presentation last week
which was based on 18 frac stages.
 PVA raised its EF inventory by 34% as it now includes the Upper EF
as a distinct horizon (475 gross locations). This increased inventory
figure is before giving any credit to overlapping locations, which the
company believes could add up to 400 additional locations. We are
now assigning value to the Upper EF in our NAV model, but we
believe there is still more upside as the bench is further de-risked.
Our new $20 price target represents a 10% discount applied to a
~$22.20 NAV. Our prior $19 target reflected the same discount to a $21 NAV

Magnum Hunter Resources

MHR : NYSE : US$7.34
Target: US$10.00


Magnum Hunter Resources is an oil-leveraged
independent oil and gas company, engaged in low-risk
development and exploration in the Williston Basin and
Appalachian Basin (Marcellus and Utica Shales).


Investment recommendation
MHR has built solid asset bases in the Marcellus and Utica Shales as
well as the Williston Basin (WB). We believe a renewed focus on the drill
bit and deleveraging the balance sheet (with further asset sales) should
continue to act as positive catalysts for the stock going forward.
Investment highlights
 Growth continues to be driven by the Marcellus and Utica. The
company expects to bring on a third rig here in the near future, and
wells targeted to be brought online between now and YE 2014 are
expected to add ~31 MBoe/d in net production; this is greater than
the company’s entire output from continuing operations in Q1/14.
MHR remains comfortable with its 2014 production exit rate
guidance of 32.5 MBoe/d from continuing operations.
 MHR continues to build up the value of its Eureka Hunter
midstream business. As of April 2014, the Eureka Hunter’s
gathering flow through recently hit a peak rate of 236 MMcf/d. With
the completion of expansion projects currently under construction,
the company expects that Eureka Hunter will have a throughput
capacity of 1.2 Bcf/d by YE 2014.
 The company has done a good job enhancing its liquidity. As of May
6, 2014, MHR had total liquidity of ~$131.2M. To further enhance
its liquidity, the company is pursuing additional non-core asset
sales. It expects to close such potential sales throughout the
remainder of 2014. MHR has already sold its Canadian WB assets
for US$68M, which is expected to close this week.
Our $10 price target represents a 20% discount to a ~$12.50 NAV

Talisman and Painted Pony – updates

Eagle Ford on the horizon?

Look at that trading range with an $11 base and
$13 ceiling. What’s the catalyst to take it
beyond that $13? Carl Icahn & American

Call it a comeback? Shares of TLM jumped after
the company posted strong Q1/14 earnings, driven
by higher North American gas and liquids prices,
increased liquids volumes and a gain on the sale of
assets. Additionally, Q1/14 production of 384
MBOE/d (includes assets held for sale) was also
above expectations. The EPS beat Skolnick’s (CG)
estimate was a result of better-than-expected
production as well as lower-than-forecast royalties
and unit op-costs. Having reached the lower end of
the prior US$2-3 billion in targeted divestments
faster than the expected 18 month timeline,
management remains confident in hitting its next
US$2 billion target. Furthermore, according to a
Bloomberg article, both TLM and its 50% JV
partner, Statoil (STO), are considering selling
their joint venture in the Eagle Ford, which
could fetch more than US$4 billion total


Shares of Painted Pony Petroleum are down from their $12.14 highs of last month. PPY reports Q1/14 results on Tuesday, May 13 (after market close). Canaccord Genuity Energy Analyst Anthony Petrucci is expecting a positive operational update, including robust production numbers, further color on improved completion techniques and likely an increased bank line. This is a company that expects to increase production by 50% per share this year and another 60% per share next year. Recent production numbers suggest they are ahead of their forecast pace. The company’s five-year plan has them reaching 100,000 boe/d in 2018 (current production of ~13,500 boe/d). They could potentially reach that level just by drilling
on existing drilling pads, and would only have drilled <15% of potential drilling locations.

Given the company’s forecast production next year of 20,500 boe/d, Petrucci says PPY is now trading at just 5.7x 2015 EV/DACF.

Recent well performance is well ahead of type curve (~30% better) given an adjustment
in completion techniques. The biggest risk to PPY’s model is natural gas prices, as the geological risk has been significantly reduced given the extensive delineation drilling the company undertook prior to its development drilling program. If natural gas prices hold in Petrucci believes PPY will be successful in reaching its lofty production targets.


Trading Alert WRES

Added to positions

- Jack A. Bass Managed Accounts



Below Average
As of 22 Apr 2014 at 10:28 AM EDT.


Open 5.22 P/E Ratio (TTM) 12.4x
Last Bid/Size 5.25 / 16 EPS (TTM) 0.42
Last Ask/Size 5.26 / 2 Next Earnings 5 May 2014
Previous Close 5.19 Beta 2.31
Volume 108,870 Last Dividend
Average Volume 871,471 Dividend Yield 0.00%
Day High 5.27 Ex-Dividend Date
Day Low 5.13 Shares Outstanding 73.1M
52 Week High 5.44 # of Floating Shares 69.65162M
52 Week Low 2.46 Short Interest as % of Float 2.00%

Quicksilver Alarm Bells

My  recent column suggested watch and wait . a number of readers replied they were committed and certain .

I am watching and the market has yet to bless KWK .

Here is an extract from a Seeking Alpha article warning that Quicksilver and Forest Oil face such pressures that bankruptcy may be in the future.

  • The high natural gas price has trapped both companies which have loaded their balance sheets with a lot of debt.
  • Both companies have tried to deleverage their balance sheets over the last 12 months.
  • They still have a long way to go in order to strengthen their weak balance sheets.
  • A bankruptcy is not out of the question.

Valuation Results

Both Quicksilver and Forest have a lot of work to do on the debt front. Those investors who ignore the debt hurdle or try to put it aside, are making a huge mistake. In fact, both companies carry scary debt to CF ratios that threaten their survival, considering also the fact that the natural gas price is inflated currently and will not stay at the current levels of $4.5/MMbtu for long.


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