Pine Cliff Energy Ltd. BUY

PNE : TSX-V : C$1.42

BUY 
Target: C$2.25

COMPANY DESCRIPTION:
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
TIME TO GAS UP
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
BNK : AIM
BUY 
Target: C$6.00

COMPANY DESCRIPTION:
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
FOCUSED ON BOTTOM LINE IN 2014
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.
Valuation
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
HOLD 
Target: C$32.00

COMPANY DESCRIPTION:
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
TURNING ON THE VALVES
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.
Valuation
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.

TOG

TSX : C$8.54

BUY 
Target: C$13.75

COMPANY DESCRIPTION:
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.

Valuation:
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
CATALYSTS EXPECTED; TIME TO GET
IN: ADDING TORC TO CG FOCUS LIST
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
BUY 
Target: C$43.00

COMPANY DESCRIPTION:
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

DOUBLING PRODUCTION AND
TESTING THE MONTNEY LIMITS
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.
Valuation
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.

LRE :

TSX : C$4.03 BUY 
Target: C$6.25

COMPANY DESCRIPTION:
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.

Summary
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 Amazon.com) 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
HOLD 
Target: C$32.00

COMPANY DESCRIPTION:
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.
Valuation
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.

 

 

 

North Dakota : Bakken Makin ‘ Hotspot

English: An Oil Pump in western North Dakota

English: An Oil Pump in western North Dakota (Photo credit: Wikipedia)

By George Leong, B.Comm. for Profit Confidential

When it comes to petro-dollars, North Dakota isn’t the first place you might think of—but soon it will be. The aggressive efforts to develop shale oil have turned North Dakota into one of the top states for growth and employment nationwide.

Since oil first started to be processed from shale formations, the development has been rapid. And today, the amount of oil produced from shale via the fracking technique (the breaking of shale formation using a water, sand, and chemical mixture to access the commodity below) has intensified.

In fact, if you add the proposed oil from Canada’s oil sands, the U.S. will become much less dependent on oil from the volatile Middle East. Texas oil magnate T. Boone Pickens is probably giddily thinking of the investment opportunities, as he has long been an opponent of oil from the Organization of the Petroleum Exporting Countries (OPEC), the largely Middle Eastern oil cartel.

A clear indication of the impact of shale oil can be seen in the monthly report from OPEC. According to the report, OPEC predicts a decline in its market share due to the influx of shale oil (Source: Lawler, A., “OPEC to lose market share to shale oil in 2014,” Reuters, July 10, 2013.)

The growth of shale oil will likely only quicken as new sites are developed and related technology improves. In fact, after Texas, North Dakota is the next biggest producer of oil nationwide—accounting for roughly 10% of the U.S.’s current daily production. (Source: Austin, S., “North Dakota Oil Boom,” Oil-Price.net, August 13, 2012, last accessed July 11, 2013.)

And while there are numerous players in the production of shale oil, one of the key ones in North Dakota’s Bakken oil fields is Continental Resources, Inc. (NYSE/CLR). The company controls nearly one million net acres in the region.

 

In the first quarter, Continental Resources reported net production of about 121,500 barrels oil equivalent (BOE) daily, which included 76,900 BOE from its Bakken shale play in North Dakota and Montana. And the projections are extremely bullish, as the company has targeted a whopping 603,000 BOE for its North Dakota wells, along with 430,000 BOE for its wells in Montana. (Source: “Continental Resources Reports First Quarter 2013 Results,” Yahoo! Finance, May 8, 2013, last accessed July 11, 2013.)

If these numbers pan out, it would become one of the world’s top oil-producing areas, accounting for around 3.3% of OPEC’s current total daily production.

Another key player in the Bakken region is Whiting Petroleum Corporation (NYSE/WLL), with close to 600,000 net acres in North Dakota.

So while OPEC will continue to dominate the global oil market, the state of North Dakota is becoming the biggest big-oil sensation in North America since the tar sands in Alberta. That’s bad news for OPEC, but good news for investors.

 

 

 

Bellatrix Exploration Ltd

BXE : TSX : C$6.18
BXE : NYSE
BUY 
Target: C$9.50

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.

Investment recommendation


We have updated our estimates and target price following the announced closing of its $122 million gross JV transaction with Grafton Energy Co I Ltd. After fully reviewing the transaction, we estimate it was  over $0.60 per share accretive to Bellatrix, higher than our original ~$0.40 take, which is in line with the market reaction on Thursday. We are maintaining our BUY rating, but increasing our target to C$9.50/share (from C$9.00), reflecting the forecast incremental value associated with the transaction. Our target is based on an unchanged
0.9x multiple to NAV and reflects a 6.8x 2013E EV/DACF multiple. We continue to favor BXE as our top intermediate stock given its attractive
valuation, significant resource opportunity set, and superior operational and technical focus.
Investment highlights
JV is over $0.60/share accretive on our estimates. This reflects a nine well development plan in 2013 with 20 wells in 2014, weighted 2/3
towards Spirit River opportunities. We expect project payout to occur in ~2016, and anticipate Grafton will convert to a 17.5% GORR, thus
eliminating its exposure to future abandonment obligations.
Two remaining JV options provide additional ~$1/share potential value.
Further acceleration of its large undeveloped well inventory (>1,000 drilling locations in its two core target formations) is key to further
revaluation of the stock. The two remaining JV options in the deal could potentially bring in an incremental $150 million. Assuming similar
accretion, this has the potential to increase our valuation by a further ~$1.00/share.
Valuation
Bellatrix trades at a 0.6x multiple to CNAV, a 4.9x EV/DACF multiple,and $38,700 per BOEPD based on our 2013 estimates, compared to peer
group averages of 0.8x NAV, 7.6x EV/DACF, and $67,800/BOEPD.

Twin Butte Energy Ltd.

Official seal of Lloydminster

Official seal of Lloydminster (Photo credit: Wikipedia)

TBE : TSX : C$2.12
BUY 
Target: C$3.20

COMPANY DESCRIPTION:
Twin Butte Energy Ltd. is an intermediate producer focused on heavy oil development along the Lloydminster fairway of Alberta and Saskatchewan. The company adopted a yield plus modest growth strategy upon closing its acquisition of Emerge Oil & Gas in early 2012.

Investment recommendation
Twin Butte released first quarter results largely in line with its guidance and CG/consensus estimates. Despite headwinds from wide heavy oil differentials, strong condensate prices that factor in its blending costs, adverse weather, and isolated production challenges at Primate, Twin Butte maintained a payout ratio below 100% with average production down only 1.6% QoQ. We have maintained our BUY rating on the stock and target price of C$3.20, based on a 1.0x multiple to NAV and reflecting a 2013 EV/DACF multiple of 6.8 times.
Investment highlights
Q1 in line, no surprises. Production averaged 17,254 boe/d, in line with our estimate of 17,326 boe/d and consensus of 17,190 boe/d. CFPS of $0.13 was also in line with our $0.13 and consensus of $0.12.
Prudently scaled back CAPEX in January but narrowing differentials could enable re-acceleration in H2/13. Capital spending was previously scaled to $85 million (from $110 million) given isolated issues at Primate and widening heavy oil differentials. Given an improved differential outlook, we see potential for a H2/13 CAPEX increase of $5 to $10 million.
Payout ratio remains best in class; current dividend is solid. Twin Butte maintains one of the lowest total payout ratios amongst the high yield Intermediate E&P group with a total payout ratio pre/post DRIP of 100/95% on our 2013 estimates.
Valuation
Twin Butte trades at a 0.7x multiple to CNAV, a 5.2x EV/DACF multiple and $41,800 per BOEPD based on our 2013 estimates, compared to peer group averages of 0.7x CNAV, 7.8x EV/DACF and $64,400/BOEPD.

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