From Dundee - i was forwarded this morning - POSITIVEBlackbird (BBI; Buy; $0.30T):This morning, BBI announced that it has drilled and cased its third Montney well at 02-20-70-7W6, located on the western side of its Elmworth acreage. The well is located three miles to the west of its 05-26 and 06-26 wells completed in Mar. Proximity to infrastructure was one of the key reasons for locations of the well in addition to nearby competitor activity, notably ECA. BBI initially drilled a 2,850m vertical pilot well to define the Upper and Middle Montney. Following analysis of the logs, it drilled a 2,000m hztl leg targeting the middle Montney. With a drilling cost of $3.5m with pilot ($2.8m without pilot), costs are down considerably from the prior 06-26 well at $5.5mm, which also targeted the middle Montney. With drilling operations completed in 32 days, it also showed a marked improvement to the 6-26 well which was drilled in 48 days. All in all, drilling time was 35% less with the pilot and 51% without (see figure below). The well will now be completed using NCS sliding sleeve frac technology over 71 stages using energized foam fracs, which will reduce water disposal costs. Further, using foam vs water will also reduce the amount of load fluid, allowing for quicker clean-up and a more telling example of potential well productivity during the testing phase. Completion is likely to start in mid-Nov with results expected in Jan ‘16, which should be a major catalyst for the stock.
Liquidity. Before drilling, we estimate the company had $23m in net cash (trading at EV of $800/ac for its Elmworth lands), which is enough to fund the cost of this well ($9-10m) and a planned infrastructure tie-in in the New Year with 5.0mmcf/d of capacity. Per the prior disclosure, the company has a couple of options on the table, waiting for a better idea of well results before committing to any firm infrastructure takeaway plans; however, we’re optimistic that a successful result will be complemented by an elaborate infrastructure strategy.
Read-through to BBI from recent Montney transaction. Recall, KCK recently sold to Orlens. If we assume KCK production was worth $65k/boe/d (in-line with a recent LXE deal at $62k/boe/d), it leaves land value of $96m paid for 49 net sections at Kakwa ($2m per section), which we expect carries the bulk of the value given delineation work to-date. Even if we conservatively risk the value of BBI productive capacity by 50%, and their Elmworth land value by 50%, we arrive at a valuation of $125m, which implies $0.35/sh (assuming current $0.065/sh cash value is spent on this well and 2016 infrastructure tie-in), or >75% upside from these levels.
Summary. We have a $0.30 target on BBI, which remains based on a $2,750/ac average value for Elmworth lands and includes an $18m equity financing at $0.15/sh in mid-2016 to fund continued Montney development. Without this dilution, our target would be $0.40/sh. Our view is that the results from this upcoming well result will go a long way to validate previous delineation work in its first two wells, previously disclosed – to be clear, they resulted in two LRNG and condensate discovery wells that effectively validate the technical viability of two independent prospective Montney intervals across 25-30 sections in a play that has nearly 70 sections of aerial extent and could be worth >$2.00/sh (vs. the stock at $0.20/sh) under a development scenario funded with >$20m of net cash (no debt). Otherwise we believe our value based on land alone is justified by recent precedents in the area ($2.9m per section paid by NVA to buy Pipestone vs. BBI which paid <$0.2m to build out its land position). Now that the company has proven the technical merits of the reservoir, the focus for this upcoming well result turns to development when we trust that BBI can show per well costs will come down, the completion process will be refined to best accommodate this reservoir and hopefully, results will improve to confirm commerciality.