Novus Energy Inc NOVUF

Griffiths McBurney

[a149306]

Griffith McBurney

Novus Energy Inc.1 BUY
NVS
.91 Target: $1.60?

VALUATION

We continue to divide our target price valuation into two components. The first is an unchanged base
cash flow multiple component of $1.00, and we are using a 5.6x debt adjusted target multiple to arrive
at this component. We then estimate that the company’s increased Viking horizontal development
drilling opportunity base of 115 (up from 90) net future locations represents unrisked potential of
$1.97/share, providing significant upside potential over time. We have then applied a 30% risk factor to
this valuation to result in an incremental
.59 in value. On a combined basis our new $1.60 target
price (up from $1.50) implies an 11.1x debt adjusted target multiple compared to the peer group
average of 6.7x which is line with other resource players.

Acquisition metrics of $31,006 boe/d and $5.76/boe
NVS calculated acquisition metrics of $31,006/boe/d and $5.76/boe after adjusting for land and the $8.0
million of positive working capital. We feel it’s important to highlight that the reserves the company
acquired were primarily (78%) gas and that it appears the company acquired the assets at a discount to
what many producers have been paying for Viking assets as of late. To further highlight the discount
that NVS paid for this acquisition, we calculate a PV of $2.7 million for NVS’ Viking wells which results
in an incremental value of $50-$60 million assuming 25 new locations which is significantly more than
the ~$9.0 million it paid. This transaction is positive to NVS and we believe that the company acted at
the right time as resource play prices continue to rise. In addition, the transaction provides the company
with additional cash to fund its ongoing drilling programs in the area.
NVS now has access to 115 net Viking drilling locations
The acquisition provides Novus with a significant expansion opportunity in its key Dodsland operational
area. Prior to yesterday’s release NVS had amassed 90 net Viking drilling locations (4 wells/section)
and with the acquisition has now added 25 locations which bring its total to 115 locations (4
wells/section). We also note that the producing assets that will be acquired are primarily located in the
Garrington, Mapleglen, Twining and Watts areas of Alberta which some prospective for horizontal multi
stage frac drilling targeting Banff oil, and Viking and Elkton gas.
NVS ENTERS INTO A FARM IN AGREEMENT ON 0.5 SECTION OF VIKING FOR
.3 MILLION
NVS to license 4 horizontal Viking wells on the farm in lands
In addition to the acquisition of the Privateco NVS entered into a farm in agreement in the Dodsland
area of Saskatchewan on 0.5 sections of land. Novus will issue ~0.3 million common shares at a price
of
.91 per share as part of the agreement which requires NVS to license 4 horizontal multi stage frac
Viking oil wells on these lands by July 30, 2010. , The farm in lands are located in Township 30, Range
21-22 W3M, and are located in close proximity to the largest concentration of horizontal Viking
producing wells in the Dodsland area.
OPERATIONS UPDATE
In Q4/09 NVS drilled 6 horizontal Viking oil wells
The company also provided an operations update in yesterday’s release. In Q4/09, NVS and its partner
shot 9 square miles of 3D seismic on their joint lands, and drilled and successfully completed, 6
horizontal Viking oil wells. The 6 wells are producing but we note that 5 of the 6 wells are production
restricted due to gas conservation and third party constraints. Currently, oil cuts and production rates
are steadily increasing and the wells appear to be initially capable of an average production rate greater
than 50 boe/d based upon available initial measurements. Additional results are expected in the coming
weeks.
9 Viking wells are planned at Flaxcombe, Saskatchewan
We remind investors that NVS recently closed the acquisition of 8 net sections in the Flaxcombe area of
Saskatchewan where the company has a 100% WI in the majority of its land. Upon completing the
acquisition, NVS shot a 12 section 3D seismic program and now plans to drill 5 horizontal multi stage
frac Viking oil wells on these lands in H1/10. The company is also expected to drill 4 Viking oil wells on
its recently acquired 0.5 section of land in the Flaxcombe area in H1/10. In addition, NVS will perform a
Peter Doig, CFA
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Associate: Cassandra Berard
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February 4, 2010
clean out of its existing horizontal well acquired through the acquisition of Ammonite Energy Ltd. The
company currently has 30 gross, 25 net horizontal Viking oil wells surveyed and being licensed for
drilling in its Dodsland and Flaxcombe core areas and plans to drill 35 net wells targeting the Viking
formation in the area in 2010.
CHANGES TO OUR ESTIMATES
We have made changes to our estimates to reflect the acquisition. We have made no changes to our
2009 forecast which include forecasted production of 339 boe/d based on a $32.5 million capex. This
derives our CFPS f.d.d. estimate of (
.03) and positive working capital of $22.1 million. For 2010 we
have adjusted our production forecast to 1,500 boe/d (previously 1,400 boe/d) which is based on our
increased capex assumption of $39 million to account for the acquisition, which now results in forecast
CFPS (f.d.d.) of
.13 (down from
.14) and positive working capital of $17.9 million