The report issued is well done. I am focusing on the downside risk. The key downside risk we see is negative revisions to the 2016 consensus production outlook if the company decides to minimize Cash Flow spending. It will be interesting to evaluate what Kicking Horse does over the next year, with reduced drilling activity, reduced revenue streams and also when they come off of their royalty holiday. Most investors do not understand the increase in costs once the wells come off of the royalty holiday.
More to come.
Good job by Cormark on the report.
Kicking Horse Energy Inc. (KCK - TSXV) - Buy CAD 4.75
Initiating Coverage With A Buy - Wednesday, September 16, 2015
Initiating coverage with a Buy. We are initiating coverage on KCK with a Buy rating and $4.75 target price, which reflects 9.5x 2016 strip EBITDA multiple, 58% of our risked NAV, and 23% of the unrisked NAV.
East Kakwa firming up and getting better, which should lead to strong reserve growth and upside to our NAV. East Kakwa well results in the coming 1-2 quarters will derisk and likely improve already strong well economics. We estimate that the stock is only reflecting 65% of East Kakwa value not reflected in 2P under the existing type curve. Additional derisking could add $2.17 per share in risked NAV. The company’s acreage is in well-positioned parts of the play and the recent improvements from the NCS completion approach are improving economics, which would result in an additional $2.00 per share of risked NAV.
West Kakwa vertical well and industry drilling could begin to derisk this acreage, which is not being reflected in the stock at all. We see an additional $1.00 per share risked NAV upside in the coming 1-2 years as the East Kakwa is derisked and the Lower Montney, West Kakwa acreage, and Pinto acreage are tested.
Stock price upside coming from derisking, not production growth, in the near term; downside risk to 2016 consensus production estimates. The key downside risk we see is negative revisions to the 2016 consensus production outlook if the company decides to minimize CF outspend. Therefore, in our view, the upside to the stock will need to come from derisking.