Canadian Western Bank

CWB

TSX : C$36.99
BUY  Target: C$42.00

COMPANY DESCRIPTION: Canadian Western Bank is a Schedule I chartered bank that operates in Western Canada. The Bank specializes in mid-market commercial lending and offers a full complement of personal banking services. Through the Canadian Western Bank Group, the firm offers a diversified range of financial services across Canada. CWB operates 41 bank branches and has more than $19 billion in assets.
All amounts in C$ unless otherwise noted

Financials- Banks

SOLID LOAN GROWTH
Investment recommendation We are maintaining our BUY rating and slightly increasing our target price to C$42.00 (from C$41.00). We have increased CWB’s valuation target premium to 17% (from 14%), in-line with its historical average (see Fig. 11) to reflect relatively higher EPS growth expectations of 14%/16% vs. the Big-6 banks average at 5%/7% (based on consensus estimates). Our annual EPS estimates remain relatively the same (see Today’s Changes box). The partial replacement of high cost Series 3 Preferred with NVCC (4.4% yield) is offset by our lower NIM forecasts of 2.75% (from 2.87%) for F2015. CWB has a favourable positioning towards our key bank themes, specifically better operating leverage (+1%/1% in F14/15E) and large exposure to higher growth commercial loans (~75%), contributing to solid loan growth (+13% YoY).
Investment highlights  Q1/F14 results solid. CWB reported adjusted cash EPS of $0.67 (up 3.1% QoQ and 15.5% YoY), above our (and consensus) forecast of $0.65. While NII of $125.3 million (up 0.4% QoQ) was lower than expected due to NIM, non-NII of $28.5 million (up 9.0% QoQ) was higher than expected, PCLs were lower than expected, and NIE was in-line. CWB generated positive leverage of 1.7% in Q1/F14. Total loans grew 3.7% QoQ.
 Strong credit trends. The PCL ratio was flat QoQ at 19 bps and below our 21 bps forecast. The result was at the low end of management’s F2014 guidance for 18-23 bps. GILs declined 16.0% QoQ to $53.9 million (33 bps of total loans).
Valuation F2015E bank group P/E multiple of 11.5x that CG uses in valuing the Canadian banks.

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.

Bellatrix Exploration Ltd.

Manly ferry SS BARAGOOLA and French warship BE...

Manly ferry SS BARAGOOLA and French warship BELLATRIX behind at Morts Dock (Photo credit: Australian National Maritime Museum on The Commons)

BXE : TSX : C$7.12
BXE : NYSE
BUY 
Target: C$10.00

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.

Investment recommendation


Bellatrix announced an asset sale and associated $200 million JV with Daewoo and Devonian Natural Resources Private Equity Fund. The deal  was $0.50/share accretive to our NAVPS estimate. Capital acceleration continues to be key to re-rating the shares and we see potential for multiple expansion on the stock given its industry-leading growth profile; we forecast 50% YoY production per share growth in 2014.
Fundamentally, Bellatrix remains one of our top stock recommendations

We have maintained our BUY rating but have increased our target to C$10.00 (from C$9.50 target) given the $0.50/share NAVPS uplift associated with the JV transaction. Our target is based on a 1.0x multiple to NAV and reflects a 2014E EV/DACF multiple of 4.8 times.
Investment highlights
Attractive “promote” brings in a deep pocketed strategic partner. The $52.5 million asset sale was central to the transaction, providing for capital acceleration potential. This provides a clear benefit to BXE in light of the 50/50 JV structure and brings in a deep pocketed strategic partner. We believe the market may draw comparisons to Daewoo’s entry into West Central Alberta with PETRONAS’ early entry into the Basin whereby it took a modest initial investment and subsequently
followed up with a larger corporate acquisition.
Valuation
Bellatrix trades at a 0.7x multiple to CNAV, a 5.5x EV/DACF multiple and $41,500 per BOEPD based on our 2013 estimates, compared to peer group averages of 0.8x NAV, 7.3x EV/DACF and $72,500/BOEPD.

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.

Mosaic Capital Corporation

M : TSX-V : C$7.31
BUY 
Target: C$9.75 

COMPANY DESCRIPTION:
Mosaic Capital acquires majority stakes in small industrial companies in mature market niches. The company currently controls six industrial and one commercial real estate investment company, all located in Western Canada.

Investment recommendation


We think Mosaic is an attractive investment opportunity for investors looking for an industrial acquisition story. The company has demonstrated an ability to acquire strong cash-generation firms at attractive prices. We believe the cash flows from the existing portfolio of companies supports the current share price, and Mosaic’s considerable “dry powder” capital provides the potential for $4.50/share additional growth. The story has the potential to grow considerably beyond that point as additional capital is deployed.
We are launching coverage with a BUY rating, given the strong 35.0% one-year potential rate of return to our C$9.75 one-year target (including a 1.6% dividend yield).
Investment highlights
We believe there are four good reasons to consider investing in Mosaic:
1. Solid track record – Mosaic roughly tripled its EBITDA from 2011 to 2012 while driving return on capital from 5.7% to 12.9%. Over the same period, the company returned more than $13 million to shareholders and has a trailing payout ratio of 63%.
2. Strong portfolio of niche businesses – Mosaic’s portfolio consists of small defensible niche businesses. The low capital requirements combined with strong, stable margins deliver solid (and we think growing) free cash flow.
3. Significant dry powder – We estimate Mosaic has $35 million of available capital to deploy towards future acquisitions. We estimate that the
deployment of this capital could add $4.50/share of value.
4. Aligned management – With 53% of the common stock held by management and insiders, we think the company’s interests are strongly aligned with investors.
Valuation
Our target is based on low-single-digit organic growth and a premium 6.5x Q1/15E EV to Q2/15E – Q1/16E EBITDA multiple for potential acquired EBITDA.
We believe the bulk of the valuation upside potential lies in the deployment of Mosaic’s already-raised capital on accretive acquisitions.

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.

Paramount Resources Ltd.

Drilling companies most often lease the rights...

Drilling companies most often lease the rights to drill for and produce oil. (Photo credit: Wikipedia)

POU : TSX : C$35.44
BUY 
Target: C$44.00

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.
All amounts in C$ unless otherwise noted.

Investment recommendation


Paramount reported Q1/13 results largely in line with CG/consensus estimates. The company remains capacity constrained at Valhalla; however, third party restrictions have begun to abate at Musreau leading to potentially higher volumes near term. Construction of its Musreau deep cut gas plant remains on time and budget.

We have increased our expected NGL yield on its Resthaven Montney gas wells given increased long term confidence by the company, which plans to add a 12,000 bbl/d expansion to the condensate stabilizer system at its Musreau plant in 2014 at a cost of $35 million. We are increasing our
target price to C$44.00 (from C$40.00) based on a commensurately higher NAV estimate and an unchanged 1.0x multiple, while also increasing our rating to BUY (from Hold), given a potential return to target of 24%.
Investment highlights
Q1 a slight beat; third party constraints abating. Q1 production averaged 22,591 boe/d, largely in line with CG/consensus of 22,186/22,375 boe/d.
Operating CFPS was $0.15, also in line with CG/consensus of $0.16 and $0.17. March production averaged 23,600 boe/d, a record volume.
Step change in growth approaches; contemplating another step. Its 200 MMcf/d Musreau deep cut plant remains on schedule for commissioning
in late Q3. Additionally, it now plans to add a 12,000 bbl/d expansion to the condensate stabilizer system in 2014 to handle higher condensate
yields. Finally, Paramount is in preliminary stages of planning an additional natural gas processing plant for its Deep Basin core area.
Valuation
Paramount currently trades at a 0.8x multiple to CNAV, 33.4x EV/DACF, and $169,200/BOEPD based on our 2013 estimates, versus peer group
averages of 0.7x CNAV, 9.9x EV/DACF, and $75,600/BOEPD.

Twin Butte Energy Ltd. Q4

Pipes layed by a horizontal drilling machine

Pipes layed by a horizontal drilling machine (Photo credit: Wikipedia)

TBE : TSX : C$2.32
BUY 
Target: C$3.10

COMPANY DESCRIPTION:
Twin Butte Energy Ltd. is an intermediate producer focused on heavy oil E&D activity within 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.
All amounts in C$ unless otherwise noted.

Investment recommendation


Twin Butte released its 2012 year-end financial results and provided an operational update. Production at Primate continues to be stabilized for
a second month in a row and is currently at 2,700 bbl/d, which should alleviate market concerns over production declines in the area, in our
opinion. The company has not been affected by spring break-up to date and has had a strong start on its 2013 drilling program which includes
90 net wells planned. We have maintained our BUY rating on the stock and target price of C$3.10, which is based on a 1.0x multiple to NAV and reflects a 2013 EV/DACF multiple of 6.8 times.
Investment highlights
Q4/12 results in line. Production in the quarter averaged 17,531 boe/d, in line with our estimate of 17,401 boe/d and consensus of 17,390 boe/d. CFPS of $0.16 was also in line with our forecast of $0.15 and consensus of $0.16.
Active horizontal drilling program.

The company has witnessed encouraging results from its horizontal drilling efforts in Q1/13; as such it is planning approximately one third of its 90 net well program this year to be horizontal, including at least 8 and 10 horizontal wells at Wildmere and Frog Lake, respectively, after break up. It has drilled 22 successful wells to date on its acquired lands from the Avalon and Waseca transactions and continues to pursue an active drilling program there this year as well.
Valuation
Twin Butte trades at a 0.8x multiple to CNAV, a 5.5x EV/DACF multiple and $44,500 per BOEPD based on our 2013 estimates, compared to peer
group averages of 0.9x CNAV, 10.5x EV/DACF and $75,900/BOEPD.

Twin Butte Energy Ltd

A workover rig.

A workover rig. (Photo credit: Wikipedia)

TBE : TSX : C$2.05
BUY 
Target: C$3.10

COMPANY DESCRIPTION:
Twin Butte Energy Ltd. is an intermediate producer focused on heavy oil E&D activity within 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 announced its 2012 year-end reserves and an operational update. Its reserve additions and FD&A costs ($24/boe) were in line with
expectations and prior management guidance. From our perspective, the clear takeaway from the release was the workover and performance
update at Primate, where production is up month-over-month to 2,600 boe/d; this should alleviate market concerns over recent production
performance and in our opinion provide a positive tailwind for the stock.
Our NAV estimate drops modestly based on our roll-forward; therefore, we have trimmed our 12-month target price to C$3.10 (from C$3.15)
and maintain a BUY rating on the stock. Our target is based on a 1.0x multiple to NAV and reflects a 2013E EV/DACF multiple of 7.1 times.
Investment highlights
Primate update the key takeaway from the release. Its January 31 update on Primate prompted a massive pullback on the stock; however, the company has announced that production has stabilized at 2,600 bbl/d through February (up from ~2,500 boe/d) given workover efforts,
including installation of five oversized pumps on existing wells (high volume lift). Its operational capabilities are also confirmed by our review
of Frog Lake performance on pages 6 and 7 of our note. Reserve update was in line with expectations. All-in FD&A of $24/boe and a 1.0x recycle ratio were in line. It had 5.3 mmboes of positive extensions (mostly Waseca and Avalon), and it booked 1.6 mm boes at Primate, versus 1.1 mmboes last year with 1.0 mmboes of production.

Valuation
Twin Butte trades at a 0.7x multiple to CNAV, a 5.2x EV/DACF multiple, and $41,200 per BOEPD based on our 2013 estimates, compared to peer
group averages of 0.7x CNAV, 10.6x EV/DACF, and $73,500/BOEPD

RAY SMITH PRESIDENT AND CEO OF BELLATRIX EXPLORATION – update

Sunset in Central Alberta

Sunset in Central Alberta (Photo credit: HandsLive)

RD:  Ray, where are you at for production right now?
RS: We exited the year at 19,500 barrels equivalent so for four consecutive years we have met our guidance for annual and we have met our guidance for exit rates. We expect to average around 20,000 for the first quarter plus or minus and continue to grow as we go through the year and
target end of the year at over 31,000.

RD: How much of that is oil and liquid rich?
RS: It’s all oil and liquid rich. We are staying on the liquid side between 32% and 35%, depending what is on and what’s off on any given quarter. We don’t expect that to change much. But what we are drilling is hugely profitable, whether it contains gas or not. So for example the Notikewin/Falher play in Central Alberta using new technologies that we are using on our latest group of wells, have been giving between 6 and 8 BCF per well or coming  on at 12 to 15 MCF/day with 35 barrels per million of liquids. These wells are producing in the first 90 days of production a BCF of gas. The finding costs are $0.60, the lease operating costs are $0.60 – that is $1.20 all in and our liquids alone have recovered $3.25. Hugely profitable.

RD: All I ever hear is Alberta Oil and Gas – no one interested. What do you say to those investors?
RS: I think a lot of that has to do with the overall energy market, the fact that a lot of companies have balance sheets getting in distress which has caused the companies to start selling assets and reduce values. We have had a weak gas environment in North America and western Canada is predominately a gas market, but there are only a few gas plays that are still drillable at these weak gas prices that have a great rate of return. So it’s like saying I don’t like cars anymore

Follow

Get every new post delivered to your Inbox.

Join 2,117 other followers