More RBC Ithaca Energy (TSX: IAE; $2.72)
Stella to star in 2014
Rating: Outperform Risk Qualifier: Not Assigned
Price: $2.70 Target Price: C$3.50
Implied All-In Return: 61% NAV per Share: C$3.82
Capitalization
Shares O/S 322MM Total Value $870MM
Float O/S 316MM Float Value $852MM
Control Block Widely Held
Target Price Valuation: C$3.50 set inline with sum-of-the-parts tangible NAV
Qtrly CFPS FD; US$ Mar Jun Sep Dec Year
2012A $0.11 $0.06 $0.12 $0.06 $0.35
2013E $0.10 $0.20 $0.24 $0.21 $0.76
2014E $1.53
2015E $1.86
Commodity Price & Sensitivities 2013A 2014E 2015E
Crude Oil Price (Brent, US$/bbl) $108.00 $103.00 $102.00
CFPS Sens to US$10/bbl Brent Crude Oil change 8% 8%
Source: Company reports, RBC Capital Markets estimates
Investment highlights
Ithaca is among our favourite development plays for 2014 as it offers material production and
cash flow growth at an attractive valuation. Stella’s first oil in Q3/14 should be a
transformational event, which we forecast delivering on the company’s long-term goal of
25,000boe/d.
Valuation: Ithaca trades at a 20% discount to our C$3.38/share core NAV, compared to a
peer group average discount of 2%. The stock also trades at just 1.7x 2014E operating
cash flows. The Stella development accounts for 65% of core NAV, and we see successful
delivery of first production as the key catalyst to unwind the stock’s valuation discount.
Potential catalysts
Stella development progress: A result from the A2 production well is due imminently.
We expect management to continue providing regular progress reports, most
importantly flow tests from the third and fourth production wells, likely to occur in April
and July, respectively. Based on the results of the first well, we believe that there is
scope for a modest reserve upgrade at the 2013 year-end assessment. The Greater Stella
Area accounts for almost 50% of Ithaca’s total net 2P reserves of 69mmboe.
Shareholder returns on the horizon: We estimate Ithaca can generate over $300 million
of free cash flow (post-capex) in 2014, rising to over $450 million in 2015. Although the
company is yet to commit to any payout strategy, we believe Ithaca has an opportunity
to stand out from peers by offering shareholders a regular return on investment
(potentially a better than 10% yield), while investing to sustain a 25–30,000b/d
production business.
Risks
Risks: The Stella development is central to achieving management’s production target of
25,000boe/d, and any significant production underperformance relative to expectations
is the primary risk to our valuation and outlook.