Raging River Exploration Inc. Remains Top Pick Junior Oil and Exploration

RRX : TSX : C$4.98
Target: C$5.50

Raging River Exploration Inc. is a junior E&P company focused on the development of the Viking light oil resource play in Saskatchewan, and trades on the TSX under the symbol RRX. The company was created from the spin-out of assets following Crescent Point’s acquisition of Wild Stream Exploration in 2012.
All amounts in C$ unless otherwise noted

Investment recommendation

Q2 results presented no surprises given the company pre-released its estimated production for the quarter in its operational update on July 16. The principal takeaways were the third consecutive increase to its 2013 guidance and the company’s continuous step-out drilling successes to date. Raging River remains one of our top Junior stock recommendations as it provides investors with a solid strategy of strategic resource capture acutely focused in the Viking resource play in
southwest Saskatchewan, and a best in class management team with a history of value creation and development execution.

We have  maintained our BUY rating and C$5.50 target price based on an unchanged 1.1x multiple to NAV and a 7.4x 2014 EV/DACF multiple.
Investment highlights
Q2 in line. Second quarter production averaged 4,620 boe/d, in line with our estimate of 4,594 boe/d and consensus of 4,425 boe/d. Operating CFPS came in at $0.15, in line with CG/consensus of $0.15.
Third guidance increase. The company upwardly revised its guidance for a third time this year; although capital spending and production both rose, the company continues to deliver above type curve results.
Management does an enviable job consistently beating expectations. Inventory expansion a key theme. The company recently drilled and tested nine wells at Beadle, seven of which were drilled in previously untested sections. Management estimates the NPV value uplift from this type of inventory expansion to be in the range of $50 to $100 million.
Raging River currently trades at a 1.0x multiple to CNAV estimate, 7.6x EV/DACF, and $163,200/BOEPD based on our 2013 estimates vs. its peer group averages of 0.7x CNAV, 6.1x EV/DACF, and $77,700/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
Target: C$10.00

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.

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.
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.

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
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.




Raging River Exploration Inc.

'Raging River' log flume, Ocean Park
‘Raging River’ log flume, Ocean Park (Photo credit: thewamphyri)

RRX : TSX-V : C$4.19
Target: C$5.50

Raging River Exploration Inc. is a junior E&P company focused on the development of the Viking light oil resource play in Saskatchewan, and trades on the TSX under the symbol RRX. The company was created from the spin-out of assets following Crescent Point’s acquisition of Wild Stream Exploration in 2012.

Investment recommendation
Raging River announced its second positive revision to its annual guidance this year; its annual average and exit production both have increased by 100 boe/d. Despite a modest 2% increase in guidance, we believe the market will react very positively to the revision, especially in light of profound wet weather impacts on producers across the Basin in the second quarter (and the resulting delayed return to drilling and completion operations post spring breakup) and an unchanged capital program this year.

RRX remains one of our top Junior stock recommendations as we believe it provides investors with a solid strategy of strategic resource capture acutely focused in the Viking resource play in southwest Saskatchewan, and a best in class management team with a history of value creation and development execution. We have maintained our BUY rating and C$5.50 target price based on an unchanged 1.1x multiple to NAV and an 8.0x 2014 EV/DACF multiple.
Investment highlights
Guidance up despite slow Q2 and adverse weather. Annual average and exit production both have increased by 100 boe/d to 4,850 boe/d and
5,700 boe/d. Despite drilling only four wells in Q2, it maintains an aggressive H2/13 program with three rigs currently running.
Inventory expansion key to thesis and stock performance. We expect additional growth in H2/13 to its current inventory of 1,400 well locations, as the company plans to drill 30 wells in Q2 through Q4 in previously undrilled sections.
Raging River currently trades at a 0.9x multiple to CNAV, a 7.1x EV/DACF multiple, and $144,300/BOEPD based on our 2013 estimates.

BlackPearl Resources Inc.

Black Pearl
Black Pearl (Photo credit: Wikipedia)

PXX : TSX : C$2.07
Target: C$4.00

BlackPearl (PXX : TSX) is a mid capitalization exploration and production company focused on large scale resource plays: primarily conventional and thermal heavy oil and bitumen opportunities in Canada.

Investment recommendation

BlackPearl announced its long awaited roadmap for growth that includes advancing its 12,000 bbl/d thermal development project at Onion Lake concurrent with its plans to issue US$350 million in senior second lien secured notes. The announcement from our perspective was positive as it clearly addressed its near term development plans and proposed method of financing, which was in line with our previously published view.

Valuation remains extremely attractive in our view, with currently no value in the stock for Blackrod. We reiterate our BUY recommendation and C$4.00 target price based on an unchanged 0.9x multiple to NAV.
Investment highlights
Proposed US$350 million note facility fully funds capital cost at Onion.
With an anticipated capital cost of $300 to $350 million ($25,000 to $29,000/boepd) at Onion, the proposed financing would fully fund
construction of the project through 2014. Additionally, indications from its existing lenders would provide an unchanged $115 million revolving
facility (only $12 million drawn at Q1/13), providing additional financial flexibility. A successfully completed note issuance will remove near term
financing concerns, in our opinion the least dilutive path to growth and retaining optionality at Blackrod. The decision to advance Onion Lake thermal is in line with our prior view; it provides cost and size advantages relative to Blackrod, thus limiting dilution, and additionally preserves option value at Blackrod for a potential joint venture, sale, or future development.
BlackPearl trades at 0.5x CNAV, 12.4x EV/DACF, and $77,400/BOEPD on our 2013 estimates


HR.UN : TSX : C$23.35

Pirate investing
Pirate investing (Photo credit: RambergMediaImages)

Target: C$27.00 


H&R REIT is a diversified commercial real estate investment trust with a high quality portfolio of office properties, singletenant industrial properties, retail properties and development projects. Its strategy focuses on long-term leases with creditworthy tenants, matched with long-term fixed rate financing to provide stable and predictable income to unitholders.

H&R REIT completed the acquisition of Primaris Retail REIT on April 4, 2013, acquiring a portfolio of 27 properties (primarily enclosed shopping centres) located across Canada for $3.1 billion, equating to a going-in cap rate of 5.6%. Of note, one property acquired from Primaris is slated to be  sold to RioCan REIT for $35 million. To fund the acquisition, H&R REIT issued ~62.1 million units to Primaris unitholders, assumed ~$1.4 billion of debt, and utilized cash on hand of ~$100 million. This transaction culminates several months of competing for control of Primaris.
We believe that the acquisition of a portfolio of high quality Canadian enclosed shopping mall assets is a positive development for H&R REIT,
particularly over the long term. Through the Primaris transaction, H&R has acquired a large portfolio of properties within an asset class that is highly sought after and almost impossible to duplicate; we note that Primaris owned the only sizable publicly traded portfolio of urban enclosed shopping malls in Canada.

While the integration of major acquisitions takes a significant investment of effort and time, we note that H&R is also acquiring Primaris’ operating platform, which should smooth the transition.
Maintaining BUY rating, but reducing target price to C$27.00 from C$28.00.
We are reducing the cap rate utilized to calculate our estimate of NAV for H&R REIT to account for the lower cap rate attributed to the newly acquired retail assets from Primaris; our utilized cap rate is now 6.00% (from 6.25%). Our estimate of NAV per unit declines slightly from $25.33 to $24.55, reflecting the increased unit count following the equity issued concurrent with the Primaris acquisition, as well as an increase in our adjustment for the mark-to-market of debt, as interest rates have declined since NAV was last calculated. Following the completion of the Primaris acquisition, we are reducing our target price for H&R REIT to C$27.00 (from C$28.00) to reflect the slight decline in our NAV per unit estimate.

Our target price is based on a 10% premium to our revised NAV estimate of $24.55 per unit. Combined with an annualized distribution of $1.35 per unit, our C$27.00 target price equates to a 12-month forecast total return of 21%. We continue to rate H&R REIT a BUY.

Twin Butte Energy Ltd

A workover rig.
A workover rig. (Photo credit: Wikipedia)

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

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.

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