Dundee Notes on Today's News Release
Dundee Notes
Thanks to Pain_Capital on the IV board for this.
Bellatrix (BXE; Buy; $3.00T): this morning, BXE announced what we view as the first of a number of upcoming catalyst deleveraging initiatives intended to increase its growth prospect and liquidity, thereby further improving the risk/reward value proposition in its shares. Recall, in our May 18 th edition of the "Perf-and-Profit", we laid out five reasons to consider to own BXE shares which have moved up nicely from the $1.40/sh (now: $1.61/sh) level in spite of its ongoing bank line review. At the time, we stated that based on recent precedents for like peers, the rule-of-thumb where ~55% of its $520m in PDP10 value, as at YE15, would have implied $285m in bank line capacity, generally in-line with its current bank debt. In spite of this, our view was that the shares were already discounting financial distress, where we see saw the upside catalyst potential for BXE to get a lift proforma its redetermination which would take into account a variety of near-term asset A&D initiatives to free up added liquidity for growth. Asset purchase. In a proactive initiative by the company, it has acquired the working interest previously earned by its JV partner, Grafton Energy Co. I Ltd., in its core Ferrier area in exchange for $29m in equity (no cash/debt), which provides added financial liquidity in the form of using equity capitalization to add bank/credit capacity. o The terms (est. run-rate numbers). In total, the assets (2,000boe/d - 21% liquids, annualized CF of $7m based on a $9.90/boe operating netback) cost $29m (3.9x EV/DACF and $15k/boe/d vs. BXE at 9.7x EV/DACF and $27k/boe/d) to leave the company with estimated production of 37,955boe/d (from 35,955boe/d). Given no added interest or G&A costs, we see $74m ($5.35/boe), from $67m ($5.10/boe), of proforma run-rate CF, which relative to ~$91m (from ~$86m) in estimated sustaining capital results in an all-in payout ratio of <123% (from=""><129%) with="" a="" d/cf="" ratio="" of="" 8.9x="" (from="" 9.8x).="" as="" we="" show="" below,="" we="" see="" the="" deal="" as="" accretive="" to="" leverage-neutral="" run-rate="" cfps,="" while="" the="" deleveraging="" of="" the="" balance="" sheet="" also="" results="" in="" an="" increasing="" organic="" fcf="" yield="" of="" -4.9%="" (from="" -6.3%)="" and="" a="" reduced="" run-rate="" ev/dacf="" valuation="" of="" 9.3x="" (from="" 9.7x)="" where="" a="" re-rate="" to="" trade="" back="" in-line="" with="" its="" own="" multiple="" would="" imply="" +11%="" upside="" in="" the="" stock="" to="" $1.78/sh="" (from="" $1.61/sh).=""> Credit facilities update. Recall, BXE had previously announced the redetermination of its combined $460m in credit facilities had been deferred for one month, to Jun 30 th, pending several ongoing A&D initiatives that could reduce debt and improve liquidity, and require another redetermination at that time. BXE remains actively engaged in negotiations on several other A&D initiatives that, if completed, are expected to materially reduce indebtedness and improve its liquidity, but also impact the borrowing base redetermination. What are the primary reasons to consider to own BXE? The majority of the share overhang that had existed with both Orange and Baupost, its two major equity holders, as publicly disclosed sellers, has been effectively lifted; o a 22.1m shares previously cross cleared the market, to leave Orange with ~6.6m (3.4%) shares and Baupost with ~8.7m (4.5%) shares; o some speculation that Baupost has already exited the stock to reduce its position to nil, and it was not required to file again given <10% ownership="" post="" the="" first="" block="" that="" came="" on="" mar="" 31="" st;="" the="" stock="" which="" has="" been="" an="" underperformer="" ytd,="" is="" positioned="" to="" play="" catch="" up;="" o="" we="" see="" that="" ytd,="" bxe="" is="" down="" -3%,="" and="" is="" the="" worst="" relative="" performer="" amongst="" the="" group="" of="" vii="" (+86%),="" pey="" (+38%),="" cr="" (+35%),="" nva="" (+50%),="" tou="" (+38%),="" arx="" (+28%),="" kel="" (+15%),="" and="" aav="" (+2%);="" leverage,="" which="" remains="" high,="" is="" manageable,="" while="" the="" company="" has="" already,="" and="" continues="" to="" proactively="" pursue,="" initiatives="" to="" further="" reduce="" indebtedness;="" o="" current="" 2q16e="" net="" debt="" is="" projected="" as="" $649m="" incl.="" $323m="" notes,="" $43m="" w/c="" deficit="" and="" $283m="" bank="" debt,="" relative="" to="" a="" $460m="" credit="" line="" (already="" reduced="" from="" $540m,="" upcoming="" review="" may="" 31="" st),="" to="" imply="" $134m="" of="" available="" liquidity;="" o="" current="" 2016e="" d/cf="" of="" 10.4x="" is="" projected="" to="" fall="" to="" 5.4x="" in="" 2017e="" -="" bxe="" is="" positioned="" to="" show="" one="" of="" the="" greatest="" yoy="" organic="" deleveraging="" moves="" despite="" a="" conservative,="" and="" beatable,="" production="" profile="" that="" is="" slated="" to="" shrink;="" o="" it="" already="" completed="" a="" facility="" deal="" to="" bring="" in="" $75m="" in="" proceeds="" in="" exchange="" for="" a="" long-term="" rental="" fee="" which="" increases="" opex="" by="" +$0.40/boe="" -="" further="" infrastructure="" sales,="" at="" similar="" metrics,="" are="" available="" to="" the="" company;="" o="" it="" continues="" to="" evaluate="" the="" potential="" for="" non-core="" asset="" sales,="" where="" a="" portion="" of="" proceeds="" can="" be="" reallocated="" to="" a="" combination="" of="" debt="" repayment="" and/or="" increased="" capital="" (growth);="" valuation="" is="" overly="" discounted="" as="" investors="" are="" inaccurately="" pricing="" in="" the="" risk="" of="" insolvency;="" o="" we="" see="" that="" bxe="" trades="" at="" 9.1x="" and="" 6.4x="" 2016e="" and="" 2017e="" ev/dacf,="" the="" second="" lowest="" of="" its="" peer="" group="" (behind="" only="" bnp),="" which="" trades="" at="" an="" average="" of="" 12.5x="" and="" 8.1x,="" respectively;="" o="" a="" re-rate="" to="" trade="" still="" a="" half-point="" below="" the="" average="" for="" the="" group="" would="" imply="" +40%="" upside="" to="" $2.25/sh;="" commodity="" prices="" are="" moving="" higher="" amidst="" a="" backdrop="" of="" funds="" flow="" entering="" the="" looking="" for="" catch="" up="" opportunities;="" o="" we="" see="" that="" with="" wti="" and="" aeco="" gas="" prices="" projected="" to="" move="" up="" by="" +16%="" and="" +49%="" to="" us$51.50/bbl="" and="" $2.75/mcf="" in="" 2017,="" bxe's="" netback="" is="" nearly="" slated="" to="" double="" to="" $4.75/boe="" (from="" $9.40/boe);="" o="" every="" us$5/bbl="" in="" wti="" adds="" $8m="" (+7%)="" to="" 2017e="" cf,="" which="" implies="" +19%="" ($0.26/sh)="" to="" equity="" based="" on="" current="" trading="" valuation;="" o="" every="" $0.25/mcf="" in="" aeco="" adds="" $11m="" (+10%)="" to="" 2017e="" cf,="" which="" implies="" +26%="" ($0.36/sh)="" to="" equity="" based="" on="" current="" trading="" valuation;="" 2016.="" mgmt="" revised="" its="" 1h16e="" guidance="" down="" -1,000boe/d="" to="" 38,000boe/d="" (from="" 39,000boe/d)="" and="" increased="" opex="" projections="" due="" to="" lower="" volumes="" and="" new="" rental="" fees="" as="" a="" result="" of="" a="" $75m="" facility="" deal="" (long-term="" rental,="" terms="" not="" disclosed="" though="" appears="" to="" be="" ~$0.40/boe="" impact).="" its="" bank="" lines="" have="" been="" reduced="" to="" $460m="" (from="" $540m)="" and="" are="" likely="" to="" be="" revised="" lower="" once="" again="" when="" redetermination="" is="" complete="" later="" this="" month.="" we="" continue="" to="" see="">$130m of liquidity, net of these changes, at present. BXE has minimal field activity planned for 2Q16e, where we anticipate organic FCF will further de-lever the balance sheet. The numbers, mechanically updated pending a more formal review, are laid out below for your consideration: - Strip 2016. Based on strip 2016e CF of $63m ($4.73/boe), we project a 2016e total capex/CF ratio of 102% along with a 2016e D/CF ratio of 10.4x (YE16 net debt: $659m) to fully fund its capital program which results in production shrinking by -12% on an A-to-A basis. - Strip 2017. Based on strip 2017e CF of $120m ($9.40/boe), we project a 2017e total capex/CF ratio of 90% along with a 2017e D/CF ratio of 5.4x (YE17 net debt: $647m) to fully fund its capital program which results in production shrinking by -5% on an A-to-A basis. Hedges. As at May 12 th, 2016, BXE has hedged ~55% of gross natural gas volumes at an average fixed price of approximately $2.96/mcf for the period of Apr 1 st through YE16. BXE also maintains a solid base level of risk management protection in 2017e with >30% of forecast natural gas volumes hedged at an average fixed price of approximately $3.37/mcf. Summary. BXE is in the midst of taking the right steps to deleverage its balance sheet and bring a renewed growth outlook to the company. Where we anticipate further non-core asset sales to provide additional funding at highly accretive metrics, we believe the shares are set to play catch-up to the group. The prior share block was a major overhang, so the stock has trailed its peers big time on the recent ride up, which positions BXE well as funds flow enters the space looking for the value plays where they can play catch up. We think there's more deleveraging catalysts on the way, be it in the form of infrastructure and/or non-core asset sales. Fundamentals show one of the best step changes YoY in '17 versus '16 as netbacks double given operating/financial leverage in the stock. This is worth a serious look. Even if there's a portion of fast money that bought the block for the discount and the clearing of the overhang, we think the real profits are to be made in sticking around (or buying) for the shift in fundamentals that occurs over the next 6-12 months. Overall, BXE trades at 6.4x 2017e EV/DACF according to street estimates, a notable discount to its best-suited gas-weighted peers at 8.1x, mainly on account of well above average leverage of 5.7x 2017e D/CF (vs. peers at 2.9x).