Emerald Oil BUY

EOX : NYSE : US$6.47
BUY  Target: US$11.00

COMPANY DESCRIPTION: Emerald Oil Inc. is an independent exploration and production company primarily focused on acquiring acreage and developing wells in the Bakken and Three Forks shale oil formations of the Williston Basin in North Dakota and Montana. The company also has acreage in the Sandwash Basin in Colorado and Wyoming, and the Heath Shale oil formation in central Montana.

Investment recommendation EOX has successfully transitioned to an operated drilling program in the Williston Basin (WB). EOX has ~85K net acres (75% operated), a very meaningful position for a company its size. With plenty of liquidity at its disposal, EOX is poised to rapidly grow production in 2014 and beyond. Investment highlights  On the heels of the company’s successful $140M offering of five-year convertible notes, which was upsized from $125M due to strong demand, we are lowering our EPS/CFPS estimates and NAV to account for dilution. The deal was priced at 2% with a 35% conversion premium (conversion price ~$8.78/share), attractive terms in our view. Pro forma liquidity is ~$312M, including the $32.5M over- allotment option, which we assume gets exercised. Proceeds will be used to repay revolver borrowings as well as to help fund the company’s accelerating drilling program, where a third rig will go to work by the end of this month and a fourth later this year. Liquidity should also be enhanced by a significant bump in the $75M borrowing base in the spring redetermination.
Well results in the WB continue to be stellar. EOX has reported 17 operated well results to date, with an average 24-hour rate of 1,626 Boe/d. Those with long enough histories had average 30, 90, 150 and 240 day rates of 767, 574, 535 and 503 Boe/d, respectively. All are solid results, in our view. The company has stated it will be raising its 2014 Q2-Q4 and full year exit rate production guidance in May. As a result of strong well performance, EOX is also raising its Low Rider type curve EUR. Valuation Our $11 price target represents a ~15% discount to a ~$13 NAV. Our previous $12 price target was the same discount to a ~$14 NAV

Raging River Exploration Inc

RRX : TSX : C$7.95  
BUY  Target: C$9.00

COMPANY DESCRIPTION: Raging River Exploration Inc. is a junior E&P company focused on the development of the Viking light oil resource play in Saskatchewan.

Energy — Oil and Gas, Exploration and Production INCREASED GUIDANCE AND NEW FARM-IN ACREAGE
Investment recommendation

Raging River announced fourth quarter results and an operational update which was highlighted by continued momentum in the first quarter, a new 100 section farm-in transaction, and increased guidance given a capital spending increase related to new farm-in well plans.  Overall, the release was positive and reinforces our positive view of the stock. The increased inventory and growth related to the farm-in adds $0.40 of value to our NAV and a commensurate $0.50 per share increase to our target to C$9.00, which is based on an unchanged 1.1x multiple to NAV and a 9.1x EV/DACF multiple.
Investment highlights Step out success at Forgan. Assuming its new wells track a Tier 6 curve and one of its six wells at Forgan was drilled on a section with no prior inventory assigned and the other five were on sections with a prior Tier 4 assignment, we estimate the value uplift from its step out success year- to-date to be ~$65 million.
Surging forward with a new farm-in. Raging River announced a farm-in transaction with an industry partner on 100 (95 net) sections at Dodsland. Based on its updated presentation, we suspect the farm-in was on Surge Energy (SGY: TSX, BUY, covered by Anthony Petrucci).  The transaction is positive as it adds ~60 low to medium risk drilling opportunities and potential upside to 360+ locations upon success.
Guidance gets a lift.  2014E CAPEX increases by $20 million to $235 million with a commensurate increase to average and exit production rates implying incremental capital efficiency of ~$40,000/boepd.
Valuation Raging River currently trades at a 0.9x multiple to CNAV estimate, 8.4x EV/DACF, and $157,500/BOEPD based on our 2014 estimates vs. its peer group averages of 0.7x CNAV, 6.7x EV/DACF, and $83,200/BOEPD

Painted Pony – About To Run

Painted Pony Petroleum* (PPY : TSX : $8.76), Net Change: -0.02, % Change: -0.23%,

Volume: 1,073,162

A staggering amount of running room. In Painted Pony’s reserve update Tuesday night, the company announced a substantial increase in both 2P reserves and contingent resource. PPY reported 2013 year-end reserves of 290.3 mmboe, which was in increase of 52% over 2012 levels (also 52% on a per share basis). This was ahead of Petrucci’s expectations. The large increase to reserves boosted Canaccord NAVPS estimate by 38%, and as a result he has increased his PPY target price.

In Cannccords view, PPY’s Montney potential continues to be significantly undervalued by the market. With 1.7 TCF of booked reserves and another 7 TCF of contingent resources, PPY has a staggering amount of running room in the Montney that we believe will attract buyers who can capture value by accelerating the development of the resource. Petrucci highlights that PPY continues to be his favourite stock amongst the natural gas-weighted junior E&P’s

Approach Resources Inc. BUY

AREX : NASDAQ : US$21.14
BUY  Target: US$28.00

COMPANY DESCRIPTION: Approach Resources is an independent energy company engaged in the exploration, development, production and acquisition of unconventional natural gas and oil properties onshore in the US. The company focuses on finding and developing high-quality, long-lived resource plays.

Energy — Oil and Gas, Exploration and Production PROGRESS IN THE WOLFCAMP BOOSTS PRODUCTION;

Investment recommendation

AREX is a pure play Permian name with ~146K mostly contiguous net acres in the southern Midland Basin. After a year of no production growth, Q4/13 saw a solid rebound. Costs also continue to come down. As the company accelerates development in the horizontal (Hz) Wolfcamp, we expect the gap between the current stock price and our NAV to narrow.
Investment highlights  After a year of basically no growth, Q4 production grew 28% sequentially, driven by solid Wolfcamp results. AREX drilled 15 Hz wells and completed 14 in Q4/13. The company had favorable results, as the average 24-hour IP rate for the completed wells in Q4/13 was 766 Boe/d (64% oil) excluding one short-lateral horizontal well, vs. a Q3/13 average of 580 Boe/d (74% oil).
 In Q4/13, AREX completed its three-well, multi-bench pad in Central Project Pangea. Results were favorable in our view, as the Wolfcamp B bench wells had 24-hour IP rates of 928 Boe/d (70% oil) and 843 Boe/d (49% oil), respectively, while the Wolfcamp C had a 24-hour IP rate of 970 Boe/d (81% oil).
 As of December 31, 2013, the company had liquidity of $408M, including an undrawn $350M borrowing base. This mostly covers the $420M combined outspend we are modeling for 2014/2015; increases in the borrowing base should more than adequately pick up the slack. Valuation Our $28 price target represents a 30% discount to a ~$40 NAV. Our prior $30 price target represented the same discount to a ~$43 NAV

Canadian Natural Resources Ltd.

CNQ : TSX : C$40.63

BUY  Target: C$46.0

COMPANY DESCRIPTION: Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

COMPANY DESCRIPTION: Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production ADDING SIGNIFICANT PRODUCTION AT A LOW COST

We reiterate our BUY rating on CNQ post yesterday’s announcement to acquire Devon Energy’s (DVN : TSX| Not rated) Canadian conventional asset package (ex- Horn River basin and heavy oil properties) for $3.12 billion for the following reasons:
While, we were surprised by the move, CNQ did take advantage of the “buyers” market in Canada. It is evident there are plenty of asset packages on the market; recall CNQ retracted its own Montney package on 1/9 due to lack of sufficient interest. To that end, the company paid ~$36,000/boe/d unadjusted ($30,300 per boe/d adjusted for infrastructure), which looks like a steal compared to precedent transactions of ~$51,700/boe/d especially given the higher gas price environment.
The transaction is also accretive on a cash flow basis. To that end, we estimate that CNQ is paying 4.5x 2015E DACFs (when adjusted for infrastructure), which is a discount to the 5.4x that CNQ was trading at prior to yesterday.
Potential spin out of royalty assets. The company plans to either monetize or spin out the combined $140-$150 million annual cash flow royalty free lands post acquisition. Based on Freehold Royalty Trust’s (FRU: TSX | Not rated) current trading multiple, this asset is worth an estimated $1.2-1.3 billion or $1.08-1.16/share.
Balance sheet still looks strong post acquisition. At our price deck, debt/EBITDA is estimated to be 1.13x vs. the peer average of the same level, and CNQ’s pre-acquisition metric of 0.93x.
Still the torque play in the Sr’s space on our positive heavy oil thesis. We estimate the company will still be ~40% levered to heavy oil in H2/14 (down slightly from the prior ~45%), and thus will continue to benefit from our thesis on narrowing differentials.
We are increasing our target by $1 to $46 to reflect the accretion from the acquisition

Synergy Resources Update

Synergy Resources
Ipsit Mohanty 713.331.9460
Target: US$15.00

Synergy Resources Corporation is a domestic oil and natural gas
exploration and production company with over 40,000 net acres
in the Denver-Julesburg Basin, as well as 180,000 net acres in
East CO/West NE. The Wattenberg Field in the DJ Basin ranks as
one of the most productive fields in the U.S. Synergy’s corporate
offices are located in Platteville, Colorado.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Top line and bottom line growth in FY14
SYRG discussed FQ1/14 earnings in its conf call and issued updated
2014 guidance. Negative headline EPS/production miss from flooding
impact was offset by a steep prod growth outlook, and the stock finished
the day up ~7%. The updated capex budget of $189mm reflects the
addition of ~8 net Hz wells to the FY14 drilling plan due to the addition
of a 2nd rig. SYRG has guided well costs down to $3.4-3.8mm from
$4mm, to become one of the lowest-cost drillers in the basin. The 6
Leffler wells were drilled at an avg. cost of ~$3.5mm, and Renfroe well
costs were ~$3.5-$3.7mm/well.
Solid results lead into development plan
SYRG provided longer-dated results for Renfroe, with 90-day average
Niobrara production of 321boepd; we note that these rates do not reflect
the use of gas lift or compression, but both have since been installed,
indicating better rates in the future as evident from neighbors. Renfroe’s
Codell wells had 90-day average rate of 376boepd. Leffler testing has
been interrupted by third-party plant downtime, but management noted
the superior performance of Renfroe wells that had larger frac designs,
and Leffler has been completed with 20 stages/well while Phelps and
Union will see 22-26 stages per well, vs. 16-20 stages at Renfroe. FY14
should see at least ~27 wells turned to sales, with drilling spread across
B, C, and Codell on 6-well pads.
On the path of growth as planned
Post our road trip in Nov, we mentioned FY14 (Sep’13-Aug’14) will see
SYRG moving into the core of Wattenberg with full-scale pad
development. Codell will be a prominent part of development and we
believe SYRG will improve on its existing sub $4mm well cost. Further,
SYRG will accelerate drilling with a second rig and continue to remain
active on bolt-on acquisitions in the Wattenberg core. Today’s guidance
reflected all of that, but we reduce our price target to $15

Anadarko Petroleum Update Target $108

APC : NYSE : US$83.67
Target: US$108.00

Anadarko Petroleum is an oil and gas E&P company with global operations in countries including the United States, Algeria, Ghana and Mozambique. The company is headquartered in The Woodlands, TX.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We would BUY shares of APC on weakness in light of the company being
ruled liable in the Tronox suit. The decision comes as unwelcome news
as the estimated damages range from $5.15B to $14.17B. We had
believed that the case would be resolved for considerably less. While we
are lowering our price target, we believe APC has a first-rate asset base
and therefore we maintain our BUY rating.
Key points
 Critically, APC/Kerr-McGee found guilty of intent: Plaintiffs claimed
that environmental liabilities were intentionally offloaded onto
Tronox at the time of its spin-off causing it to declare bankruptcy.
The judge ruled that was indeed the case.
 Damages exceed what the market had discounted: We had said that
APC’s shares were being discounted ~$5/share to reflect the
possibility of a negative Tronox outcome. The given range of
damages equates to $10-$28/share. While this is not as large as the
$25B (or $50/sh) that the plaintiffs sought, it is materially above
what we believed the Street had been factoring in.
 Final damage amount still TBD; APC can appeal: The defendants
will be allowed the opportunity to argue whether some amount of
the damages can be offset, hence the $9B range of estimates. We
would expect APC to appeal the ruling in any case.
We value APC using a 20% discounted NAV and a multiple of
EV/EBITDA. We are lowering our NAV by $19/share to reflect the
midpoint of the expected damages range. Also, we are now assigning a
4.5x EV/EBITDA multi

Approach Resources Inc. BUY

AREX : NASDAQ : US$24.49
Target: US$30.00

Approach Resources is an independent energy company engaged in the exploration, development, production and acquisition of unconventional natural gas and oil properties onshore in the US. The company focuses on finding and developing high-quality, long-lived resource plays.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
AREX is a pure play Permian name, with 149K net mostly contiguous acres in the southern Midland Basin. After several flat quarters, production should grow nicely in Q4/13, while costs continue to come down. As AREX accelerates development in the horizontal Wolfcamp, we expect the gap between the current stock price and our NAV to narrow.

Investment highlights
 AREX announced 14 well completions for Q3 vs. only 12 in all of  H1/13. The completions were back end loaded, resulting in an exit rate from the quarter of 11.1 Mboe/d. There were some notable completions during the quarter, including the Baker B 256H (Wolfcamp B) in central Pangea, which IP’d at 1,334 Boe/d, the company’s best initial producer to date.
 AREX exited Q3/13 with ~$340M in liquidity, consisting of a $315M undrawn borrowing base and $25M of cash. Subsequent to the end of the quarter, the company closed the sale of the Wildcat oil pipeline and got an increase in the borrowing base to $350M, resulting in pro forma liquidity of $477M, which comfortably covers the ~$265M of outspend we are modeling through the end of 2014.

Southwestern Energy

SWN : NYSE : US$39.03
Target: US$51.00

Southwestern Energy is a natural gas focused E&P company with operations in the Fayetteville Shale of Arkansas and the Marcellus Shale of Pennsylvania.
All amounts in US$ unless otherwise noted

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We reiterate our BUY rating on SWN in light of its expanded 2014 capex
and production guidance released last night. The company announced a
$2.3B capital budget, up from 2013 and in line with our estimate. We
reckon that the company’s 14% growth guidance is conservative given
the level of capex. We believe another solid year is in store for SWN.
Key points
 We maintain 17% production growth in 2014: SWN’s 14%
production guidance is a fine starting point in our view, but given its
historically strong productivity performances in its key plays – the
Fayetteville and Marcellus – we see no reason to change our 17%
growth outlook for next year.
 SWN should remain one of the lowest cost U.S. gas producers: Cost
guidance was essentially flat versus 2013 and in line with our model
suggesting SWN will remain one of the lowest cost producers of
natural gas in the U.S. All-in costs should be $2.36/Mcf in 2014.
 14 vertical wells planned for LSBD; 3x 2013′s effort: This provides
added encouragement to us that SWN sees commerciality is at
hand. The company just drilled four “corner-post” wells on the 120k
acres it deems prime and in Q3/13 announced its first commercial
well with an 700 MBoe EUR. SWN’s step-up in drilling says to us it
sees substantial upside to NAV ahead. We see 150 MMBoe or $3.0B
($8.50/share) over the next few years.
We value SWN using a discounted NAV and a multiple of EV/EBITDA. By applying a 20% discount to our $65 NAV and averaging that with an 8.0x EV/EBITDA multiple on 2014E EBITDA of $2.4B, we arrive at our $51 price target.

Suncor Energy Inc. Update

SU : TSX : C$37.85
Target: C$46.00

Suncor is the largest Canadian integrated oil company, also with the largest position in the Canadian oil sands industry. Key to its growth is expansion of its oil sands business. The company completed a merger with Petro-Canada in August 2009.
All amounts in C$ unless otherwise noted.

Energy — Integrateds
The key to SU’s guidance release last night, in our view, is that the company’s capex program, cash tax and oil sands operating cost expectations support the potential for another meaningful dividend increase in February 2013 as well as further share buybacks throughout next year. Additionally, on account of a sub $8 billion capex program, we believe the market will look favorably upon the release. As a result, we maintain our BUY rating and $46 target price for the following reasons:
 Still expecting massive free cash flow potential: We expect SU to generate $2.75 billion or $1.84/share next year of free cash flow in 2014 (assuming a $7.8 billion capex budget and US$104/Bbl Brent and US$97.25/Bbl WTI oil prices), which compares to the current $0.80/share of annual dividends. As such, expect another large dividend raise in early February. As shown in Figure 4, SU has by far the largest free cash flow potential next year amongst the Canadian Sr. E&Ps/Integrateds.

 Valuation still looks cheap Shares are trading at 5.9x 2014E DACF vs. the Canadian Sr. E&P/Integrated group average of about 6.3x; and vs. IMO at 10& CVE at 6.7x.
 Next catalyst: 1) Expect the December 4th investor day to be another share price catalyst. SU plans to provide more clarity on its mid-term growth plans including Firebag 5 & 6, which are expected to be low cost de-bottlenecks. We believe the market will be positively surprised by the return potential of these projects; because that is a key unknown. 2) The aforementioned expected dividend raise in February.


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