In my previous article, I modeled a "stress test" to convey that Twin Butte can quite easily stand the test of time. Since we are looking at quarterly averages, the numbers I presented in my previous article did not take into account upside demand factors. They include recent monetary easing in China and Japan. The US economy seems to be picking up steam. China seems to be aggressively stockpiling crude, perhaps up to 700,000 barrels per day, recognizing these prices won't last forever. Therefore, I've decided to model a more optimistic scenario with the following assumptions:
Assumptions
· 2015
o CAPEX cut by $30M in 2015 to $130M
o Decline rate of 32%
o Capital Efficiency of $28K
o Q1 to Q2 2015 - averages $70 US
o Q3 2015 - averages $75 US
o Q4 2015 - averages $80 US
· 2016
o CAPEX increased to $180M in 2016
o Decline rate falls to 29%
o Capital Efficiency of $21K
o No hedging
o Royalties and OPEX continue to decline with shift to medium oil
o Q1 to Q3 2016 - average $80 US
o Q4 2016 - $85 US
· 2017
o CAPEX increased to $220M in 2017
o Decline rate falls to 26%
o Capital Efficiency of $17K
o No hedging
o Royalties and OPEX continue to decline with shift to medium oil
o Q1 to Q4 2017 - $85 US
Here are the results
· 2015
o Cash Flow - $193M
o CFPS - $0.54
o Total Payout - 98%
o Debt To Cash Flow - 1.87
o Average Production - 20,225 boepd
(click to enlarge)
· 2016
o Cash Flow - $250M
o CFPS - $0.69
o Total Payout - 96.4%
o Debt To Cash Flow - 1.41
o Average Production - 21,954
(click to enlarge)
· 2017
o Cash Flow - $320M
o CFPS - $0.87
o Total Payout - 88%
o Debt To Cash Flow - 0.98
Average Production - 24,248
(click to enlarge)
This is closer to the guidance management may present in early 2015. What does the analysis convey?
- Barely a "blip" in 2015
- Strong and growing profile in 2016 and 2017
Summary
I have done this analysis for other companies who today are trading at higher multiples that do not come close to these fundamentals in a lower price environment. As of right now, TBE is trading at $1.20 on the Toronto Stock Exchange yielding 16%. The risk/reward at this point is very compelling. Assuming WTI holds, further downside is limited, with upside potential substantial while getting a sustainable dividend to wait. Take this point of view as a companion to my previous article. The former presents a very bearish scenario. This article presents a more realistic scenario. Depending on where you feel WTI prices will land, this article will allow you to make a more informed decision on Twin Butte. In the end, once the fear subsides, rational investors will realize the compelling value proposition and I don't anticipate current price levels holding for long with the stock likely to find a bottom shortly.