National Bank - OP Target $4.50FYI -
Manitok (MEI; OP; $4.50T): take advantage of the opportunity to buy MEI now (while sentiment is at a low and quickly changing direction); silly that this is at its 52-wk low right in front of numerous upcoming catalysts (its initial Quirk Creek hztl, 3Q13 results, 2014 guidance, YE13 exit rate disclosures, drilling plans at Entice) - the stock carries way more upside potential than downside risk given its strong balance sheet, track record of consistent growth and discounted valuation
Admittedly we've mentioned MEI a lot in recent pitches of "Before-the-Bell", but with the stock having traded down to $2.42/sh - more than 25% off of where it was at just a month ago, this is silly. In our opinion, all the recent skepticism and negative sentiment around the name has provided the astute investor with a great opportunity, but it's time to act now while it still trades at its 52-wk low (its tested $2.40/sh at least five times in the past year and has never stayed down here for very long). Why has it traded down? We believe that it's mainly due to uncertainty (and a lack of understanding) around its new Entice core area (which is exactly where we believe MEI is now positioned to blow away expectations) and also some disappointment around the departure of Tim de Freitas (its former COO). That said, in our opinion, the stock is way oversold now, especially in the context of a company that remains massively discounted (it trades more than a full multiple turn below the peer group average on conservative estimates that we think its initial 2014 guidance will surpass), it's under-leveraged (it carries one of the lowest D/CF ratios in the junior arena), and has a track record of consistent top-quartile per share growth (its PPS growth was >30% each of the past two years relative to the juniors at 10-15%). It's also soon to announce the result of its first ever Quirk Creek hztl well (which could be a huge catalyst for the name), and we believe that MEI is positioned to beat its stated YE13 exit production guidance of 5,400boe/d after accounting for at least four wells that are still to be completed and tied-in within the next month or so (two at Stolberg with potential net adds of 750boe/d, an Ostracod gas well with potential net adds of 600boe/d and its Quirk Creek hztl exploration test with potential net adds of 250boe/d). In our view, an exit >6,000boe/d is not out of the question here.
Entice - wayyyy under-appreciated by the market to this point. With its recent ECA farm-in agreement, MEI will gain access to 150 net sections of land - think of the scale that asset could represent to a company of MEI's size, especially in the context of that its technical team has identified 55 unique leads for new pools (not new wells, new pool discoveries!). It comes with a full suite of 2D/3D seismic coverage (across 420 sections) and scale that supports an internal estimate of >150mmbbl of recoverable resource within its primary Glauc, Ellerslie, Pekisko, Viking, Detrital, and Nisku targets. Little companies like MEI rarely gain access to a land position of this size and scale, and in our opinion, MEI should be rewarded by the market for being the first mover into ECA on this sort of agreement - its transformation for the company and hugely additive to its unrisked NAV potential. The capital, $16m in an upfront bonus and a commitment of $106m over three years ($22m for seven wells in 2014, $33m for nine wells in 2015 and $51m for 14 wells in 2016) is easily managable when you consider that it represents just 30-50% of MEI's projected budget. This transaction reduces the company's concentration risk in the Foothills (where we all know, exploration is tough), and it provides MEI with a second core area with a low risk development profile that is scalable enough that it can be used to fund E&D initiatives in the company with the available FCF this asset will spin off.
Summary. MEI continues to screen at a discounted valuation of 4.2x 2014e EV/DACF (vs. the peers at 5.7x) despite that it maintains one of the premier balance sheets with running at a 1.2x D/CF ratio (vs. the peers at 1.7x) and with knowing that it has historically delivered top quartile PPS growth metrics of 49% and 35% over the past two years. This year, we project that MEI will grow by 30%, which is among the leaders like RRX, RMP and RTK. Also worth noting, we're also confident that MEI will beat the numbers it puts out to the street for 2014, especially considering that at this point, we ascribe no production (or upside) to Quirk Creek or its entire southern Alberta business unit - both of which have the potential to outperform pretty low expectations. In terms of other new catalysts that you should be aware of, watch for: 1) the result of its first ever Quirk Creek hztl in the next few weeks (and potentially one more before YE13); 2) its initial 2014 capital and production guidance (looks like street estimates are going up); 3) an even more fulsome depiction of the recently acquired property and the upside it could represent for MEI (first planned drilling program to begin in early 1Q14); 4) its 3Q13 results in the next week or so (expected to be in-line with the street); and 5) disclosures around what MEI actually exits 2013 at - we think production could reach >6,000boe/d (well ahead of guidance) with a little success from some of the wells currently held behind pipe or that are currently drilling.