Unlocking Value via Strategic Review
? EVENT: Amid a flurry of recent and pending peer transactions that
provide important valuation reference points, Equal has announced it will
undertake a Strategic Sale. This comes after Crescent Point just paid
$73,036 per daily boe for Cutpick – a private pure play in the
Alliance/Halkirk Viking play. Meanwhile New Source Energy Corp (NSE)
is marketing its IPO which, at indicated pricing, values production at
$74,000 per daily flowing boe. NSE is a pure play on the Hunton
(Oklahoma), which accounts for ~90% of Equal’s production. While a
non-producing asset, Equal recently sold a 50% interest in its
Mississippian acreage for $18MM – suggesting the balance is worth as
much. Equal’s only other notable property is Lochend/Garrington – with
the closest thing to a pure play being TriOil, which trades at over
$80,000 per daily flowing boe.
? IMPACT: Positive
? DISCUSSION: With Equal trading at $27,000 per daily flowing boe, past
and pending transactions make for striking valuation comparisons. With
~90% of Equal’s production coming from the Hunton, it’s the NSE IPO
that is most relevant. Given the uncertainty over the ultimate pricing, we
ran sum-of-the-parts scenarios with IPO pricing at $7, $9 and $11 per
share. These yield fully diluted per share valuations of 180%, 250% and
325%, respectively, above Equal’s current share price. This valuation
gap cannot be explained by capital structure variations – even with
Equal’s D/CF approaching 3x compared to a debt-free pro forma NSE.
This is especially true as Equal’s net debt of $160MM is well within lines
($200MM) and its $45MM convertible debenture expires in 2016.
? FORECAST/OUTLOOK: This latest decision comes as no surprise to us,
but for its stifling debt load, epic legal battles (now resolved) and the
plunging commodity price environment, Equal would have been sold
long ago. Those questioning if this team can fetch a fair price, consider
Equal’s very survival is in large measure a testament to this team’s
ability to execute on shrewd asset sales. This CEO took over when D/CF
was ~6x (with gas above $6/mcf); with D/CF now below 3x (with gas
now at ~$2/mcf) the time is right to finish what it started.
? VALUATION/RECOMMENDATION: While we reiterate our BUY rating
(SPECULATIVE risk), look for us to adjust our valuation after the NSE
pricing. For now we maintain our $7.00 target -- based on our Proved
NAV-plus-risked upside valuation approach more fully described in our
March 22, 2012 note.