Bellatrix Exploration Ltd. BUY Target Price $14

BXE : TSX : C$6.88
Target: C$14.00

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
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.


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.

Donnycreek Energy Inc. SPECULATIVE BUY

Target: C$4.00

Donnycreek is a junior pure play Montney exploration and
development company with assets in Alberta’s Deep
Basin. Donnycreek trades under the symbol “DCK” on the
TSX venture exchange.
All amounts in C$ unless otherwise noted.

Investment recommendation
Donnycreek released a brief operational update this morning on its
operations at Kakwa. The wells on the company’s three well Montney
pad (the company’s first 1.5 mile horizontals) have been successfully
completed and tested, however no test rates were provided with the
release. The company also announced a plant turn-around at Kakwa,
which will shut in production from the block for ~16 days in September,
and plans to expand the plant on the block from 15mmcf/d to 30
mmcf/d in the spring of 2015.
In our view, a fairly neutral release from the company; however, given
the delays in bringing on production at Kakwa, we have lowered our
production estimates for 2014 . Trading at just 3.1x 2015E
EV/DACF and 0.5x Base NAV (lowest NAV multiple in our coverage
universe), we continue to believe DCK is extremely undervalued relative
to its peers.
We continue to rate the stock a Speculative Buy, and look to November
for IP30 rates on the 3 recently completed 1.5 mile Hz’s (in addition to
the large production bump)as significant potential catalysts for the stock.
Highlights from the release
 Kakwa 3 well pad. DCK announced that all three 50% working
interest wells from the company’s first three well pads have been
completed and flow tested . These wells were drilled with
horizontal lengths of 1,900m, which is longer than wells previously
drilled on this acreage. The wells are expected to come on
production in October.
 Facility expansion. Donnycreek and its partners are currently
designing an expansion for its 16-7 facility to double the throughput
capacity to 30 mmcf/d of natural gas and associated liquids. DCK
and its partners plan to start-up the expansion by spring 2015.

Suncor Energy

SU : TSX : C$42.60
Target: C$50.00

Energy — Senior E&Ps/Integrateds
We believe there were four very important key takeaways from SU’s Q1
release and associated conference call:
1. Operational reliability for SU remains strong. The company reached an
SCO production record of 312 MBbl/d in Q1/14, which included a 21%
increase in sweet production compared to Q1/13. In addition, refinery
utilization has increased from 92% in 2011 to 96% this quarter. This
should help further re-rate shares, in our view.
2. SU is realizing the cash flow uptick from railing Western Canadian light
oil to its Montreal refinery. We believe this led the company to beat
market expectations; and will likely lead to increases in Sell Side
estimates. It also helped to demonstrate the free cash flow potential of
this company (SU generated about $1.4 billion in Q1 alone). Expect
more benefits once Line 9 reversal commences operations.
3. The company disclosed significant uptick to realized prices and
netbacks when selling dilbit blend in PADD III (USGC) as opposed to
PADD II. To that end, SU stated it realized an $8/Bbl net of
transportation uptick by selling in PADD III as opposed to PADD II. This
is a key confirmation of our heavy oil thesis. The best read-through on
this, in our view, is MEG Energy (MEG-T:$40.10|BUY )
4. Further confirmation around the willingness to export Canadian crudes
beyond the U.S. To that end, management stated on SU’s Q1 call that it
will look at opportunities to ship some volumes offshore that make their
way down the Keystone southern leg. As discussed in our April 21st
report “Q2 Global Energy Themes”, we believe a consortium is building
up in Canada to make the country a major exporter of oil beyond the
Bottom line: The first two points are positives for SU; and reasons why we
reiterate our BUY rating and are raising our EPS/CFPS estimates and our
target by $1 to $50. The remaining two points are key to our bullish view on
Canada as we continue to believe they will lead to Canadian crudes being
linked to global prices; and thus resulting in a re-rating of the sector.

Pine Cliff Energy Ltd. BUY

PNE : TSX-V : C$1.42

Target: C$2.25

Pine Cliff Energy Ltd. is a junior oil and gas producer
focused on dry natural gas, with assets in Alberta. Pine
Cliff trades on the TSX Venture under the symbol “PNE”.

All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We are initiating coverage of Pine Cliff Energy with a BUY rating and a
C$2.25 target price. PNE has had a great run over the last year,
increasing its share price by ~60%, but in our view, this is just the
beginning. Driven by accretive acquisitions and a rebounding gas price,
we expect this stock to go materially higher over the coming year, as
reflected in our forecast return of 58%. Our valuation is NAV based and
maps to a 2014E EV/DACF of 14.7x.
Why we believe this stock is set to outperform:
 Gas Leverage to the Extreme. Simply the best way to gain
exposure to rising gas prices, in our view, given a production
base that is 95% dry gas with no hedging in place. As
highlighted in Exhibits 1 and 2, PNE is the most levered
company to natural gas prices in our coverage universe, with a
$1 increase in AECO prices driving an increase to estimated
CFPS of ~40% and an increase to NAV of over 40%. In our view,
if you want to own gas, you want to own Pine Cliff.
 Acquisitions to drive performance. PNE has taken a contrarian
approach by purchasing dry gas while others chase oil and
NGLs. The last two significant acquisitions by the company over
the last year have resulted in share price bumps of 46% and
36%, respectively. PNE currently trades at 9.0x 2014E
EV/DACF, but as we walk through in Exhibit 3, if the company
were to buy $100 million in assets at 5x cash flow, this multiple
would be just 6.8x 2015E estimates. Use a 5$ AECO price and
it’s at just 5.4x.
 Our Call? Give this management team your money. George Fink
is well respected as an excellent steward of capital, and for
good reason. Early investors in Bonterra Energy (BNE: TSX: Not
Covered) have been handsomely rewarded over the last 16
years, with a CAGR of 45% since 1998. In addition to the energy
space, Mr. Fink has also had success in mining, where at
Comaplex Minerals he provided investors with a CAGR of 21%
over a 15 yeear period.
Our C$2.25 target price is based in part on our assumption that the
company will be successful in completing $150 million in acquisitions
over the next year and post transaction its multiple will return to the
natural gas peer group average of 9.0x EV/DACF

Bankers Petroleum Ltd

BNK : TSX : C$4.04
Target: C$6.00

Bankers’ operations are focused on developing heavy oil
assets in Albania, which include rights to develop the
Patos-Marinza and Kucova heavy oil fields (both 100%
interest) during the 25-year licence period. Bankers has
an opportunity to unlock immense potential from its 7.7
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
Investment recommendation
Bankers Petroleum announced its 2014 budget, projecting capital
expenditures of $313 million and production growth of 10-15% over
2013. The budget reflects a 27% increase over the 2013E program and
is the largest in the company’s history. Approximately 90% of the budget
will be directed toward development work, while the remainder is
earmarked for enhanced recovery initiatives and new ventures like
horizontal wells at Kuçova and 3D seismic on Block F. We have revised
our estimates to reflect updated guidance, resulting in a 2014E NAV of
C$7.05 (from C$7.15). With numerous cost-cutting initiatives planned
for the coming year, we believe 2014E operating funds could surprise to
the upside (although we have not yet incorporated a reduction in
operating costs). With a 12-month target price of C$6.00/share and a
potential return to target of 47%, we reiterate our BUY recommendation.
Investment highlights
 The company has doubled its budget for enhanced recovery
initiatives, which if successful, should generate lower decline rates
and a higher overall recovery factor.
 We expect that operating funds will outpace capital expenditures by
~10% based on a 2014 Brent price of $104/bbl. At $100/bbl, we
forecast a balanced budget.
We use a DCF model to value Bankers. Based on our 2014E estimates
Bankers is trading at a multiple of 0.57x our risked NAV, 2.9x EV/DACF
and $46,840 per flowing barrel. This is significantly below the domestic
junior averages of 0.8x NAV, 5.6x EV/DACF, and $73,200 per flowing
barrel, despite Bankers’ better-than-average netbacks and favourable
debt levels. With a 12-month target of C$6.00 and a potential return of
49%, we reiterate our BUY recommendation.

Peyto Exploration & Development Corp.

Simply a great company year after year.

PEY : TSX : C$30.82
Target: C$32.00

Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
Peyto released third quarter results which were generally neutral as Q3/13 volumes and capital spending were pre-released. It has eclipsed its previous exit rate guidance ahead of schedule and increased its exit target this year to 71,000 boe/d; however, in doing so it has also increased its 2013 capital spending by ~$65 million. Using the midpoint of its initial 2014 capital budget provides YoY growth (Q4/14 over Q4/13) of ~17% on our forecasts. The higher capital spending profile maintains D/CF at year-end 2014 below 2.0x on our estimates and 74% utilized on its bank facility. We maintain our HOLD rating and C$32.00 target price based on 1.2x NAV and 11.1x 2014E EV/DACF.
Investment highlights
Surpasses exit rate guidance in November as expected. It expects to grow production from 70,000 boe/d currently (up from the Q3 average of 56,300 boe/d) to 71,000 boe/d by year-end on higher 2013 capital spending of $565 million (up $65 million). Despite higher spending, its implied cost of adding production in 2013 is ~$17,000/boepd.
Another aggressive year in 2014 spending ~$600 million. It forecasts adding production in 2014 at a cost of $18,000/boepd in line with our prior forecasts, resulting in Q4 average growth on our estimates of 17% YoY. Its D/CF reduces to 1.9x (from 2.2x) next year on our forecasts.
No Brazeau well update but spending in 2014 implies positive results. Results from its new wells are still not public; however, its intention to expand processing capacity by 20 MMcf/d implies positive results.
Peyto currently trades at a 1.2x multiple to CNAV, a10.7x EV/DACF multiple, and $77,000/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 7.4x EV/DACF, and $71,800/BOEPD.

TORC Oil & Gas Ltd.


TSX : C$8.54

Target: C$13.75

TORC is a dividend paying junior oil & gas company with assets in Alberta and Saskatchewan. TOG is listed on the
TSX under the symbol “TOG”

All amounts in C$ unless otherwise noted.

Our target price of C$13.75 is NAV based and implies a 2014E EV/DACF of 9.2 x

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We are reiterating our BUY thesis on TOG, as we believe the stock is
well positioned for a strong run through Q4. In addition to a compelling
valuation, solid balance sheet, and motivated and proven management
team, TOG has several potential catalysts on the horizon that could
boost the stock as we head into year end. As a result, we believe the
current share price represents an excellent entry point into the stock,
and we are adding TORC to our CG Focus List.
Catalysts on the Horizon
 Catalysts Expected: Time to Get In. TOG has several potential catalysts on the horizon over the next three months, which we believe makes now an excellent entry point into the stock. These include:
 Guidance Increase with Q3? Our current model incorporates TOG’s 2013 exit rate guidance of 9,500 boe/d, with a 5% increase in production through 2014.
Given the company’s Q2 production level of ~4,300 boe/d and the asset acquisition of 5,700 boe/d, we believe TOG may be in position to raise its guidance, particularly given an active drilling program through the back half of the year. By our estimates, TOG may be in position to increase exit rate guidance by +5%.
 Upward revision in oil price decks. With the continued strength in the oil price, we believe many investment dealers will be revising their 2014 oil price decks higher in Q4. Given TOG is 85% weighted to oil, its valuation and payout ratios should look even more attractive in industry comp tables in the coming weeks


Paramount Resources Ltd.

Target (1985 film)

Target (1985 film) (Photo credit: Wikipedia)

POU : TSX : C$34.35
Target: C$43.00

Paramount has a 35-year history of successful operations in Western Canada. It takes a long-term approach to exploration and development activity of both oil and natural gas, and boasts over 50% insider ownership.Near-term growth is focused in the Deep Basin of Alberta

Investment recommendation
Paramount’s second quarter results fell short of expectations, reflecting
a higher than anticipated impact from curtailments at Valhalla and shut
in volumes at Karr. It bumped its capital program by $100 million
primarily given middle Montney success at Karr, and now maintains
~200 MMcf/d of net raw gas behind pipe available for its Musreau deep
cut facility. The principal near term operational catalyst in our view
remains the more than doubling of production volumes expected in early
2014, which should include validation of its material Montney gas and
NGL test rates via long term sustained production performance. POU is
forecast to grow into its valuation over time given its production growth,
and trades at a more reasonable 9.7x EV/DACF on annualized Q4/14
estimates. We have maintained our BUY rating and C$43.00 target
based on an unchanged 1.1x multiple to NAV.
Investment highlights
Q2 falls short, but only a bump in the road. Production averaged 20,790 boe/d versus CG/consensus of 22,860/22,922 boe/d. Operating CFPS was $0.21, in line with CG/consensus of $0.22/$0.24.
Advancing commerciality and returns from the Montney. POU continues to test a number of concepts and focuses on cost reductions in its Montney program at Musreau/Resthaven. It recently approved two, ten well pads to be drilled this year and into 2014, which will test multiple concepts, including: 1) orientation differences, 2) interwell spacing, and 3) testing offset wells in the D1 and D2 lobes of the Upper Montney.
Paramount currently trades at a 0.9x multiple to CNAV, 11.2x EV/DACF,and $82,700/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 7.1x EV/DACF, and $68,600/BOEPD.

Long Run Exploration Ltd.


TSX : C$4.03 BUY 
Target: C$6.25

Long Run Exploration is a junior oil & gas explorer with assets focused largely in Alberta. Long Run is listed on the TSX under the symbol “LRE”
All amounts in C$ unless otherwise noted.

Long Run reports strong Q2; highlights operational success Long run’s Q2/13 production of 24,431 boe/d was slightly ahead of  guidance and highlights the company’s continued operational success following the business combination of Westfire and Guide, as production continues to grow from the 2012 exit rate of 23,000 boe/d. LRE is one of our favoured names in the Junior and Intermediate space, as we believe current management has the company heading in the right direction and continued execution will prompt a re-rating of its trading levels

Investment highlights

 LRE’s production of 24,432 boe/d was slightly ahead of guidance and was up from Q1 levels of 23,600 boe/d. CFPS of 0.50 was ahead  of our estimate at $0.46, and well ahead of consensus $0.44.
 As highlighted in Exhibit 1, most of the cash flow beat came from  lower than expected royalties, due to a GCA credit that was realized during the quarter. During the quarter the company spent ~$39 million (largely in line with our estimate) primarily on the drilling of  4 Montney horizontals at Girouxville and Normandville, and 6 net  Viking wells at Redwater. Well results from these areas continue to exceed expectations.

 LRE marginally increased its operating budget for the year (from $265 to $275 million) due to a slight increase in incidental costs. The bulk of its $115 million budget for the year will be spent in Q3 as LRE continues to push forward its Montney and Viking programs.

LRE’s Q2 contained little new information, and we do not expect a material reaction from the market to the Q2 release in today’s trading. That said, the company has strung together another solid quarter and in our view is clearly demonstrating that its trading discount is not warranted.

Peyto Exploration & Development Corp.

English: 4-31-5-5 A Pumpjack in southern Alber...

English: 4-31-5-5 A Pumpjack in southern Alberta fueled by natural gas. (Photo credit: Wikipedia)

Readers of this blog and my book The Apprentice Millionaire Portfolio ( available from will know that my daughters went to university based on my position in Peyto – chasing it up from $ 8 to $ 40

PEY : TSX : C$30.33
Target: C$32.00

Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted.


Investment recommendation
Valuations across our natural gas weighted universe are down following our updated commodity price forecasts, which include a reduced near and long term natural gas price outlook. Peyto’s 2014E cash flow and NAV are down 13% and 12%, respectively, following our revised price deck, resulting in a target price reduction to C$32.00 (from C$33.00). Given the strong share price appreciation year-to-date, and modest 9% potential total return to target, we are lowering our recommendation on Peyto Exploration to HOLD (from Buy). Peyto maintains an industry leading cost structure and a clear roadmap to double-digit growth; however, we feel the shares, which trade at a 10.5x EV/DACF multiple on our 2014 estimates, reflect fair value at current levels. Our target is based on a 1.3x multiple to NAV and reflects a 2014E EV/DACF multiple of 11.0x.
Investment highlights
Natural gas price forecasts revised downward. We are lowering 2014E to US$4.25 (from US$5.25), and 2015/2016E+ at US$4.50/US$4.75. Our near term outlook is down primarily related to higher U.S. natural gas production. Our associated report includes additional details: “Intermediate and Junior E&P: Q2/13 preview and revised commodity price forecasts”.
Correlation between PEY’s stock price and commodity has broken down. On page 2 of our note, we highlight the divergent performance of PEY shares versus AECO, which has historically maintained a 0.9x correlation.
Peyto currently trades at a 1.2x multiple to CNAV, a12.6x EV/DACF multiple, and $90,100/BOEPD based on our 2013 estimates, versus peer group averages of 0.8x CNAV, 7.6x EV/DACF, and $74,100/BOEPD.





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