More Upgrades In 04 Jul 2012 BMO Capital Markets MARKET PERFORM $24.00 C
04 Jul 2012 Barclays Capital EQUAL-WEIGHT $21.00 C
04 Jul 2012 Scotia Capital OUTPERFORM $22.50 C
04 Jul 2012 Canaccord Adams BUY $23.00 C
04 Jul 2012 TD Securities BUY $23.00 C
Highlights of report by TD Securities -Travis Wood & Brian D. Milne
We hold a positive view on the potential arrangement between Open Range and Peyto and continue to view Peyto as a top natural gas growth investment. The assets are complimentary to Peyto’s existing business model, which is best characterized by its low-cost strategy and infrastructure advantage, in our opinion. We believe that Peyto is very well positioned as a result of its low-cost structure, which should continue to allow Peyto to deliver top quartile returns to shareholders. Through 2013, we forecast Peyto will post debt-adjusted production per share (DAPPS) of 14% and top quartile return on capital (three-year CAGR of about 12% compared with 4% for the group), all while continuing to pay its annualized dividend of .72/share.
Based on our estimates, the arrangement would be accretive to our CFPS (2013E +9%) and NAV/share (+3%), but we expect management to unlock more value based on the implied synergies and return-driven strategy.
Open Range’s asset mix fits very well within Peyto’s portfolio and compliments the company’s web of infrastructure. Additions of natural gas processing capacity at Ansell (Open Range-operated) helps to support Peyto’s recent step-out drilling initiatives south of Sundance. In our opinion, the transaction metrics are attractive compared with the recent natural gas-focused, Deep Basin deals.
Over the next three years Peyto plans to allocate about $245 million to these assets, which should support the drilling of 55 (45 net) wells. We expect the majority of this incremental spending to focus on de-risking of the land base, most specifically through a step-out drilling program across the Ansell property (just south of Sundance). Recent activity in the Ansell area has primarily targeted the Notikewin and Wilrich formations, which are slightly drier natural gas targets (5-15 bbl/mmcf) compared with Peyto’s Sundance Cardium wells (25-45 mmcf).
The asset overlap between Peyto’s core Sundance play and Open Range is strategically efficient from both a land and infrastructure perspective. The addition of Open Range assets at Ansell would help from an infrastructure standpoint, which includes two plants in proximity to Peyto’s recent Notikewin and Wilrich step-out drills. Together, these plants provide 80 mmcf/d of processing capacity, of which approximately 35 mmcf/d sits idle (based on our estimates).
Open Range also provides option value from its Waskahigan oil play, which is relatively closer to other Montney oil plays. We do not expect Peyto to deploy a material amount of capital to this play; however, we do highlight the attractive option value on selling the asset. Based on recent land sale metrics in the Waskahigan area, the land alone could fetch in the $750-1,500/acre range. Open Range has about 10,250 net acres of Montney potential across the Waskahigan area, which is estimated to hold about 20 horizontal drilling locations. The play is in the early stages of development; however, recent land sale activity supports a likely value of up to $15 million, which does not include any associated production. If you made the assumption that 500 BOE/d of production could go for $100,000/BOE/d, the potential sale value could be in the $65-million range, implying that Peyto paid less than $20,000/BOE/d for the core asset.