Authors: Chris MacCulloch and Stephen Swanson
Rating: Buy
12 month Target: $8.50
‘The Midas Touch’—a treasure chest of opportunities awaits investors
The Desjardins Takeaway
We held a series of institutional teleconference meetings with Executive Chairman Richard McHardy, President & CEO Fotis Kalantzis and Vice-President Corporate Development Mark Hodgson and came away with increased conviction on the story as one of our favourite ways to gain exposure to strengthening natural gas prices and consolidation within the WCSB. Recent acquisitions add considerable depth to the asset portfolio, with increased diversification through exposure to the Alberta Montney.
Highlights
A golden opportunity—potential for consolidation and significantly improved drilling economics at Gold Creek. The assets provide exposure to one of the hottest areas of the Montney fairway for oil and liquids-rich drilling activity, which should eventually present several opportunities for consolidation to drive future synergies. The company is striving to further enhance the economics of the play through increased frac intensity and there could be opportunities for capital cost savings through increased scale.
Finding another diamond in the rough? Simonette acquisition adds low-decline production, with the potential for significant cost savings and future drilling upside. The transaction is similar to last year’s Bellatrix acquisition; we note that both assets were starved of capital in recent years due to above-ground challenges, which contributes to the ultra-low field decline rate of <20%. The assets have significant development potential and were effectively acquired for ~1.5x cash flow, before factoring in production and cost optimizations.
The crown jewel—west-central Alberta assets have turned into a free cash flow machine which will fund future development and consolidation opportunities. When factoring in highly attractive well economics, reduced operating costs and the ~19% base decline from the assets, west-central Alberta has become a free cash flow growth engine for SDE. Based on the reserves evaluator’s model, the assets are expected to generate ~C$620m in free cash flow over the next five years, which should help fund growth and consolidation in the Montney (and other areas), with the eventual goal of returning capital directly to shareholders.
Valuation
Our C$8.50 target implies 4.0x EV/DACF (2022E), toward the upper end of the Desjardins E&P coverage list, reflecting the ample dry powder on the balance sheet.