Jennings Capital
ROCK ENERGY INC. 12-Month Target: $5.75
(TSX-RE $4.58) Risk Rating: ABOVE AVERAGE
RE-INITIATING COVERAGE
ROCK’S CFPS GROWTH TO ROLL ON
Rise of the Viking: As Rock’s Mantario asset is positioned for water/chemical flood, Rock rolls ahead with its emerging Viking light oil play at Onward. With 125 potential follow-up locations identified on 8.5 net sections of land, we expect the multi-year drilling inventory will continue to grow on further evaluation of Rock’s 38 net contiguous sections of land.
Several Sources of CFPS Growth: We forecast Rock’s CFPS (fd) will grow by 48% in 2014, following growth of 112% in 2013. Driver s include the Viking’s cost structure which is lower than the corporate average, improved heavy oil differentials and production expansion. EOR approval at Mantario would also position Rock for further margin growth.
Financial Position Reflects EOR Preparations: We forecast Rock’s net debt to cash flow ratios will increase from 0.8x in 2013E to 0.9x 2014E on current capex guidance, including $22MM for infrastructure at Mantario.
Leverage to Heavy Oil Prices: Rock’s current production of approximately 4,500 Boe/d is weighted ~85% to heavy oil, providing significant leverage to improving heavy oil differentials.
Catalysts: Near-term catalysts include year-end reserves, a potential expansion of the 2014 capital program and guidance on drilling success at Onward, the pending EOR approval for Mantario, improving heavy oil differentials and any exploration activities.
Primary Risks: The primary risks include production concentration risk at Mantario, commodity price volatility and the inability to execute on emerging opportunities.
Valuation Methodology
The target price reflects a 1.0x multiple of our before tax risked exploration net asset value. Our valuation also implies an EV/2015E DACF multiple of 5.3x.
Recommendation
We are re-initiating coverage on Rock Energy Inc. with a BUY recommendation and 12-month target price of C$5.75 per share.