ATB Capital Markets on Lycos Energy ATB Capital Markets analyst Amir Arif thinks Lycos Energy Inc. “is one of the best avenues to play the Manville stack open hole multilateral trend.”
Seeing the Calgary-based company at the “forefront” on the drilling trend in Alberta oil play, he initiated coverage with an “outperform” recommendation on Monday.
“Open hole multilateral drilling has been meaningfully changing the economics, activity, and outlook in the Manville stack in the greater Lloydminster area over the past two years,” said Mr. Arif. “The April 2024 new royalty program for multilateral oil wells in Saskatchewan should further increase activity in this trend on the Saskatchewan side.
“We believe that Lycos offers the greatest exposure to this emerging trend, which is still in its early days. With Lycos’ management’s background in oil resource development, asset focus on Manville stack opportunities, expanded footprint through acquisitions, current inventory of openhole locations, and with the Company leading development with various openhole multilat well designs, we believe that LCX is at the forefront of this development trend. From organic growth alone, production is expected to increase from 4.1 mboe/d [thousand barrels of oil equivalent per day] in Q4/23 to 5.7 mboe/d by Q4/24 through the drilling of approximately 27 net wells in 2024. With an identified inventory of 200 net locations, we believe that the Company has a long runway of organic growth ahead. In addition, we believe that there will be room for more consolidation in the region and we believe that LCX is one of the better positioned companies to lead on that front as well, given its focus on the play, public listing, and minimal debt on the balance sheet.”
Seeing an “attractive valuation based on near-term growth alone,” the analyst set a target of $5.50 per share. The average is $6.45.
“Based on current strip prices, LCX is trading at EV/DACF valuation of 2.8 times 2024 and 2.2 times 2025,” he said. “Given the above industry organic growth rates within cashflow, over seven years of drilling inventory at the current pace of drilling, minimal net debt on the balance sheet, wells generally outperforming typecurves, and payouts of 2-6 months being achieved on recent drilling, we believe that the valuation remains attractive, especially based on our 2025 outlook. This outlook could be further enhanced with accretive acquisition opportunities that might emerge over time with the Company having acquired four key assets in 2023.”