National Bank Update - $4 targetManitok (MEI; OP; $4.00T): down, but most certainly NOT out! We think the name will move higher today on account of another boomer (700bbl/d) test rate at Stolberg that easily positions the company to beat its stated YE13 exit guidance; as noted a few weeks back, buy the name while it trades at one of the lowest multiples in the Junior Growth arena (3.2x EV/DACF vs. the peers at 5.4x) despite holding a pristine balance sheet (<1.0x D/CF ratio vs. the peers at 1.9x) and a track record of delivering top-quartile per share growth in each of the last two years (35-50% per annum)
As we noted in our "Before-the-Bell" edition from Nov 28th (just three weeks ago), we felt compelled to advocate buying MEI (against all the negative sentiment) after it had fallen 30% (way too much in our opinion) to $2.20/sh on account of: 1) the departue of its former COO, Tim de Freitas; 2) uncertainty by investors around the prospectivity of its new core area (Entice) and the apparent shift in corporate strategy away from the pure-play Foothills focus; 3) an underwhelming (at least to the market - we were quite happy with it) test rate (235boe/d - 88% liquids) from its initial hztl well at Quirk Creek (which now backstops at least 15 new hztl drilling locations); 4) a weak 3Q13 financial result (due to timing delays associated with bringing new production online); and 5) reduced 2013 average production (from 4,300boe/d to 4,050boe/d) and CF (from $49m to $41m) guidance (due to widened light oil differentials and on account of shifting plans to bring two wells on production a few weeks later after YE13). But at that point (and still today!), the stock traded with a super-attractive 3.2x 2014e EV/DACF multiple (based on mgmt guidance) with a strong balance sheet supported by a D/CF ratio <1.0x, a two-year track record of delivering top-quartile per share growth metrics (>30% per annum), all while we felt the company remained on track to easily eclipse its restated YE13 exit guidance of 5,400boe/d with numerous upcoming catalysts (its second Quirk Creek hztl well and the first batch of drilling at Entice) to get excited about. So in summary, we felt better to buy as the relative risk/reward proposition was heavily skewed to our favour!
The big news from this morning - another BOOMER well result (20th Cardium well delivers an IP14 of nearly 700bbl/d) at Stolberg and corporate production is well in excess of 5,500boe/d (vs. its stated exit rate of 5,400boe/d).
MEI announced that its 20th Cardium hztl well at Stolberg (75% WI) tested (over two weeks - this is NOT a 40-80 hr test rate!) at 695bbl/d - more than 115% above its type curve IP30 rate, which itself backstops an NPV of $13m, an IRR >90%, a P/I ratio >2.5x and payback in just over a year! Even better, the well result adds two or three more follow-up locations to Stolberg's undrilled inventory (which was already at 15-20 - enough to fully support another year-or-two of drilling). In addition, MEI announced that its Stolberg vert Ostracod natural gas well (75% WI) is flowing, after a week on production, at >620boe/d. With these wells now brought on production, MEI is producing well in excess of 5,500boe/d (55% liquids), relative to its stated YE13 exit guidance of 5,400boe/d (55% liquids). We believe there's the potential (with adding all of its net tie-ins together and deducting for natural declines) that the company could reach 6,000boe/d within a few weeks, which would backstop a strong 1Q14 financial result!
Summary - in our view, MEI is at "pound-the-table - it's time-to-buy" levels - what's the fundamental downside?
As mentioned, they trade at just over 3.2x 2014e EV/DACF (or 4.0x on NBF's conservative CF estimate of $58m versus mgmt guidance at $70m), relative to the Junior Light Oils at 5.2x. The key here, MEI is going to grow by at least 35% (probably more like 50-55%) next year on a per share basis (again, NBF's 2014 average is light at just 5,800boe/d versus mgmt guidance at 6,100boe/d) - that puts it top four in the peer group (behind only DCK, KEL and RRX). It also carries a pristine balance sheet, with a D/CF ratio of 0.9x by mgmt's guidance, or 1.4x by NBF's conservative estimates. The sentiment isn't going to shift on this name over night, but we definitely think this morning's release places the company heading clearly in the right direction. We expect the stock to respond well today, and would be a buyer heading into 2014. MEI remains one of our favourite names in the Junior Growth arena.