LeG, I don't understand your enthusiasm. This belated report is their death knell. Costs have skyrocketed ~700% beyond their earlier (and ridiculously low) estimates they touted last year. Last year, they said capex of $5K per bbl of capacity was all that was needed. Today's numbers say reality is $35K per bbl of capacity - only 7x more...
$416MM is a non starter. No way to get financing, even if they were a credible organization. The best they can hope to do is try and find somebody to flog this to. I doubt they find anyone who will pay enough even to cover their past expenses.
Remember this comically absurd hype piece by Deslauriers last year (one of many pump pieces where he traded for his own account ahead of publication with impunity before mysteriously vanishing from RI earlier this year). There were plenty of "believers" last year (in which "management did nothing to disabuse themselves about their ignorance), but a few of us commented that their low capex estimates were beyond patently ridiculous.
By Michael J. DesLauriers
18 Mar 2007 at 08:20 PM GMT-04:00
TORONTO (ResourceInvestor.com) -- A couple of months ago, at the end of January, we profiled a company called Southern Pacific Resources [TSXv:STP],which appeared to be seriously undervalued on a fundamental andrelative basis, and which stood out as possibly one of the last cheapways to leverage oneself to Alberta’s prolific oil sands.Inefficiencies in the junior resource market being what they are,coupled with the market’s recent corrective posture, STP appears to becheaper now than when we first brought it to the attention of readers,closing Friday at C$1.28, or off about 12% from the closing price atthe time of our last write-up.
We are bringing the story to readers’ attentionagain because we intend to illustrate the undervalued nature of thestory from the cash-generation angle, something we did not do lasttime. In our last piece, we focused on relative valuations perrecoverable barrel in the ground versus peers, which showed SouthernPacific to be extremely cheap. (Investors wanting to review thosenumbers should read our last story which is linked here and at the top of this article.)
Today we are going to review the economics of thestory, in order highlight the substantial cash flows that STP should beable to generate, and where the stock could be trading in a couple ofyears time based on a price to cash flow multiple in line with otheroil sands producers.
Production and Timeline
Oil sands SAGD technology is not new, but it isimproving every year as more operations come onstream, and STP has thebenefit of their experience. What this means is that costs andtimelines are fairly well understood and can be projected with areasonable level of confidence.
By H2-2010, based on its current rate of progress,Southern Pacific will be well through its pilot-production stage andstarting to produce something on the order of 30,000 barrels of oil perday.
Based on an independent report by petroleumconsultants Degolyer & MacNaughton, estimates are that capitalcosts to reach this level of commercial production stand somewherebetween $125-$150 million.
Cash Flows and Multiples
With 53 million shares fully diluted today, webelieve that Southern Pacific will climb to the C$3-C$4 per share markin early June when they announce their new recoverable reserve report,which we believe (and recently reported drill results are more thanconfirming) should see the company with north of 500 millionrecoverable barrels, greater than a 3-fold increase from present levels.
In terms of future dilution then let’s assume,worst-case, all equity for the C$150 million, and C$3 per share as theplacement level, which we feel comfortable with. This would see STP addon another 50 million shares, taking the grand total to slightly over100 million shares. Southern Pacific would then have a full treasury,enough to move forward through pilot production, and to the 30,000barrels of oil production per day range.
Because SAGD production is more expensive thanconventional production, we believe that US$25 per barrel is a fairassumption of where costs per barrel of production will come in. Usinga long-term oil price of US$50/barrel, STP will be in a position tocash flow roughly C$275 million on an annualized basis starting in thesecond half of 2010. Payback on CAPEX would be a very short 6 months,illustrating the truly unique one time opportunity in oil sands lands,which they aren’t making any more!
On a per share basis, with about 100 million shares out, this would equate to C$2.75 per share of cash flow.
Given that the company should be reporting, asmentioned above, a reserve of over 500 million recoverable barrels,equating to a Reserve Life Index of 45 years at the projectedproduction rate of 30,000 barrels of oil per day, we believe that STPwill trade at a cash flow multiple in excess of 10X, similar to its oilsands producing peers also boasting extremely long RLIs.
Some people think that oil prices will be betterthan US$50/barrel and certainly SAGD technology will continue toimprove, lowering costs, but even if we discount our numbers back, westill arrive at a C$20+ share price in the second half of 2010.
Conclusion
For Southern Pacific, we can say that in thenear-term (next 3 months), the share price should be much higher thanksto the upcoming new recoverable reserves report which could triple thecompany’s reserve position. There is added room for upside because thecompany’s current valuation in terms of market cap per recoverablebarrel remains at a fraction of peers. The short term and first phaseof the story is thus the value of recoverable barrels story.
In the longer term, phase two takes over, and thatis the shift from the cheap valuation per recoverable barrel side, tothe tremendous cash flow and solid multiple side of a production story.We think that patient investors who can come into the company aroundthese valuations, and then tuck their shares away even as their gainsgrow, could be rewarded with something like a 20 bagger over the next 3or 4 years.
Indeed, by the end of this decade we believe thatinvestors will look back at some of the current opportunities in theAlberta oil sands space and appreciate that a few of the so-calledjunior players involved in the area had presented some truly terrificand once-in-a-lifetime investment opportunities. This is a generationalproposition which is unique in the world.