Longview vs. Cardinal EnergyI have chosen to compare Longview (LNV) to Cardinal energy (CJ) due to the striking similarity between the two companies in terms of production size, type and composition.
Production (based on latest available numbers):
CJ: 6150 barrels (90% oil, 10% NG) – Mostly legacy conventional
LNV: 6000 Barrels (71% Oil, 9% NGLs, 20% NG) – Mostly legacy conventional
Operating Netback:
CJ: $35 per BOE
LNV: $32.8 per BOE
Decline rate:
CJ: 15%
LNV: 19%
Reserves:
CJ: 17.75m (total value $343m at 10% discount)
LNV: 37.87m (total value $609.5m at 10% discount)
PDP Reserves:
CJ: 12.6m ($243.5m at 10% discount)
LNV: 14.37m ($280m at 10% discount)
Debt:
CJ: $4m
LNV: $125m
Debt to Cash flow
CJ: 0.1
LNV: 2.0
Payout ratio:
CJ: 60%
LNV: 105%
Expected 2014 cash flow:
CJ: $70.3m (Feb. 2014 presentation)
LNV: $77mm (December 2013 guidance)
It is clear from the above CJ debt and sustainability ratios are vastly superior to LNV, however LNV has a much larger reserve base. Production profile and netbacks are very similar. Yet, the valuation the market is attributing to both companies is vastly different
Enterprise value:
CJ: $487m
LNV: $333m
Per flowing barrel:
CJ: $79K
LNV: $55K
Per barrel in reserves:
CJ: $27.51
LNV: $8.79
Per PDP barrel:
CJ: $38.6
LNV: $23.17
Yield:
CJ: 5%
LNV: 10.8%
EV/CF (non debt adjusted):
CJ: 6.92
LNV: 4.32
As can be seen from the above, CJ is trading at a substantial premium to LNV on all metrics, it is understandable that a company with virtually no debt and a very low payout ratio would deserve some premium, but it is unclear why this premium deserves to be an order of magnitude larger than LNV’s. It is worth noting that both companies are targeting single digits growth in production going forward and both are focusing on low decline assets.
LNV has $121m more in debt than CJ, however LNV has potentially $266m more in probable reserves, which if valued at 50% of their 10% discounted rate they would still be worth $133m. In essence LNV’s additional reserves fully cancel CJ’s debt advantage. An analyst can debt the potential value of reserves, but when it comes to cash flow LNV is projected to generate 9.5% more in cash flow in 2014 vs. CJ yet CJ trades at a cash flow multiple that is 60% higher.
We can quibble on what cash flow multiple to apply, but it is very difficult to justify LNV trading at 60% discount to CJ in light of all available information. At 20% discount LNV would trade at 5.53 EV/CF multiple or $6.41 per share; at par valuation it would trade at $8.77 per share.
Considering that the AAV overhang is gone, there is no other reason for LNV to trade at such a large discount to its peers (peers average EV/DACF is 7.7) or to such a large discount to CJ. Should the discount persist, then LNV either has an execution problem, management credibility problem or a strategy problem or potentially a more serious asset performance problem.
2014 will prove to be a vital for this company, if the asset base is as potentially productive as expected and a management team that is solely focused on LNV is able to execute, we could see a major re-rating in the value of the shares, there is one advantage to a company with leverage is that when the re-rating of cash flow multiple take place, the adjustment takes place exclusively at the equity portion of that enterprise value, this is why a 25% rise in the multiple from 4.3 to 5.4 translates into 40% rise in the share price to $6.2.
The combination of a 10%+ dividend and a strong potential for re-rating in the trading multiple could easily lead to a 50% gain in the share price over the next 12 months ($6.2 per share + 48c in dividends).
Regards,
Nawar