Q2/15 results first look: in-line results, dividend cut mostly already priced in
Twin Butte reported Q2/15 results which were in line with our expectations. Production of 17,351 Boe/d (88% liquids) was in line with our estimate of 17,466 Boe/d (89% liquids) and consensus of 17,708 Boe/d (range of 17,300 to 18,130 Boe/d). CFPS of $0.16 was in line with our estimate of $0.15 and consensus of $0.14 (range of $0.10 to $0.19).
Dividend Reduction
In response to the low commodity price environment, Twin Butte reduced its monthly dividend to $0.003 per share, a 70% reduction from $0.01. This is the second reduction this year (~38% reduction in January); however, we believe this is a prudent move by
the company in the current low oil price environment. The dividend cut seemed to have already been substantially priced into the stock with a (pre-reduction) yield of ~27%.
By reducing the dividend, the company will improve its sustainability by decreasing its expected go forward cash outlay.
Operational Update
Twin Butte continues to progress its transition to a medium oil producer with four wells drilled in the Provost region during the quarter. The wells at Provost also have a lower operating cost as compared to the vertical heavy oil wells the company previously targeted. We have also seen improvements in operating and transportation costs as the company continues its transition. Y/Y operating costs have reduced by ~8% and total cash costs for the company have decreased by 25% from 2014 to Q2/15, improving overall sustainability in this lower commodity price environment.
As a result of improved drilling and completion design, the company has managed to show significant improvement in per well costs. The cost savings are from a combination of ~2/3 well design and ~1/3 from reduced service costs. Wells at Provost have shown all-in well costs of ~$800,000, an improvement over well costs of ~$900,000 last
year. Single-lateral Lloydminster well costs have averaged ~$800,000 down from ~ $1.25 million last year. We expect these cost improvements will provide Twin Butte
with stronger capital efficiencies and will help keep production levels flat in the current commodity price environment.
Hedging
Twin Butte continues to layer in hedges at opportunistic times, and was able to enter into 2,000 Boe/d of WTI hedges priced at C$85.00 for 2016 as well as 1,000 Boe/d of heavy oil differential hedges priced at C$20.00 for 2017 in mid-June.
Valuation
Twin Butte trades at a price to CNAV ratio of 51% and a 2015E EV/DACF of 2.1x compared to the junior/intermediate group at 71% and 7.4x, respectively.