Scotia Report thx to IV board
Harmattan Sale Improves Flexibility
OUR TAKE: We view the Harmattan sale as a positive development for BXE. With the disposition, the company has further reduced its leverage and positioned itself with more capital flexibility moving into 2017. We believe BXE should be able to efficiently replace the sold volumes by deploying a portion of the proceeds into its Spirit River play, while using the balance to reduce debt and/or pursue modest growth. We maintain our SP rating and $1.40/share Target Price; however, we note that BXE's improved flexibility and high cash flow sensitivity to oil prices (>45% for a US$10/bbl change from US$50/bbl WTI) make the stock a candidate to outperform if oil prices rally sharply to a sustainable position above US$60/bbl WTI and Canadian NGL prices strengthen.
KEY POINTS
Harmattan Assets Sold. BXE has agreed to sell its Harmattan assets for total proceeds of $80M. The disposition (expected to close before YE16) includes ~3.1 mboe/d (42% natural gas) of production and ~22.1 mboe of 2P reserves, with yield metrics of ~26,000/ boe/d and ~8.6x net operating income (BXE estimate). Prior to the deal BXE was trading at ~$22,500/boe/d its 2017E production and ~5.9x our estimate of 2017E net operating income. The transaction proceeds will be paid by a combination of $65M cash and a $15M vendor take back loan. The loan has a two-year term, 10%/yr interest rate, and requires that at least 50% of the quarterly net operating income from the assets be used to repay the principal.
Further Leverage Reduction. With the transaction, BXE has raised ~$400M in disposition and security issuance proceeds in 2016. The company expects to exit 2016 with ~$30M drawn on its bank line (versus ~$359M exiting Q1/16). With the majority of BXE's remaining debt termed out, we believe the company has reasonable flexibility to move forward with its capital plans.
Guidance Expected in Early Q1/17. Our estimates are updated, including 2017E capital spending to $110M (from $95M). The company should be able to make up the sold production volumes and hit our previous Q4/17E production estimate with additional drilling in its core Spirit River play. We now see the potential for modest growth in 2018E (at US$60/bbl WTI and >C$3.00/mcf AECO), based on the improved flexibility