GMP's clients are buying because...Unlike the drivel we've recently been enjoying from a few of our favourite Board blabbermouths, here's some well-spoken points from GMP; which may explain why their clients are buying.
I like their unrisked value of $2.17, since I bought some more today at $2.15.
I expect the drivel will pile on top of this post pretty quickly (bashers like to bury stuff like this), hope the rest of you all get a chance to see it before it's buried....
August 5, 2011
SUBJECT: Twin Butte investment highlightsDETAILS: We were asked to out together some talking points on Twin Butte (TBE). We met with management recently for an update and note some highlights below:1. Clean balance sheet – Financial strength has come into focus given the recent commodity price and market weakness and TBE has a good balance sheet to execute its remaining 2011 program. Net debt was $80.9 million at the end of Q1/11 and we expect that total to be flat to down with the Q2 results (expected next Thursday/Friday). The company’s bank line is $128 million, so there is lots of financial flexibility going forward. Forecast net debt/CF is 1.2x in 2011, compared to the peer group average of 1.4x.
2. H2/11-weighted capital budget – TBE has approximately $40 million of its $66 million capital budget to spend in H2/11. This should mean strong activity levels from the company in Q3 and Q4, which should then translate into strong H2/11 production growth.
3. Quarterly production ramp-up – Q2 operations were limited by weather like most other companies in our universe, and Q2/11 production is expected to be in the 7,500 – 7,600 boe/d range (Q1/11 was 7,608 boe/d). However, with activity ramping up (as noted above) we expect good growth over the next couple quarters, with Q3 expected to be in the 8,200 boe/d range (up 9% form Q2) and Q4 in the 8,900 boe/d range (up 18% from Q2). TBE also remains on track with its exit rate guidance of 9,200 boe/d, setting the stage for continued positive growth heading into 2012.
4. Production shift is working – TBE has been focusing 100% of its capital towards its oil prospects and this is successfully translating into an increasing oil weighting. This process dates back to Q4/09 when the company completed the Buffalo acquisition, and the oil/gas weighting has shifted from 29%/71% at that point to now being 65%/35% currently, and targeting a 70% oil weighting by year-end. While both commodities have been weak recently oil prices remain significantly stronger than gas prices on a relative basis, so this shifting production base supports an improving netback structure.
5. Successful heavy oil focus – TBE’s heavy oil focus at Frog Lake is continuing, and successful development has increased production from 1,100 boe/d when it was acquired in Q4/09 to a current rate of 4,000 boe/d. TBE still has a drilling inventory of 300 net locations at Frog Lake that should support continued development for the next 2+ years, and this is a very low-risk opportunity base that is expected to remain a key growth driver for the company. It is also important to highlight that the inventory noted above only increases recovery factors at Frog Lake to the 6% range which are still very low, and given the size of the prize (OOIP of 900 mmb) there could be longer-term upside potential from areas such as horizontal drilling (and the first well drilled has delivered encouraging initial results), further down spacing, or potential longer-term thermal recovery (SAGD or CSS).
6. Heavy oil economics reminder – While most of the other resource plays are higher profile and typically deliver higher rate wells, from an economics perspective conventional heavy oil is actually one of the more stronger relative opportunities in the WCSB. As a reference, TBE assumes two type curves for Frog Lake. All-in well costs for both are $500K/well, and the base case wells assume EURs of 50 mboe, an NPV of
.9 million, and an IRR of 98%. The upside wells assume EURs of 75 mboe, NPVs of $1.5 million, and an IRR of 189%. Approximately 60% of TBE’s drilling inventory are base case wells and 40% are upside case wells, and all-in this translates into $2.17/share of unrisked value (and we don’t include any value for upside potential beyond the 6% RF).
7. Other areas potentially emerging – Beyond Frog Lake TBE is also working on multiple other oil properties which could emerge as new core areas with success. This includes an emerging Pekisko oil play at Jenner, a Lloydminster oil play at Bruce, and a Viking oil play at Esther (which could be similar to the Halkirk-Viking style play).
8. Valuation – For 2011, TBE is trading at 5.1x (6.1x debt adj’d) cash flow and $50,529/boe/d, compared to the peer group at 5.2x (6.4x) and $80,312/boe/d. For 2012, TBE is trading at 3.5x (4.1x debt adj’d.) cash flow and $41,646/boe/d, compared to the peer group at 3.5x (4.4x debt adj’d.) and $58,009/boe/d.