Eight Capital First ImpressionsLGN announced Q3/23 results, updated H2/23 guidance, and its 2024 budget yesterday evening. Impact: Positive given LGN delivered adjusted cash flow of $5.2 million, higher than the Street's estimate of $4.4 million and our $4.3 million forecast. Additionally, LGN produced an average of 5,394 BOE/d vs. the Street's 4,382 BOE/d and our forecast of 4,512 BOE/d. Furthermore, the company increased its H2/23 production guidance by 20% (Figure 2) on the strength of its initial well results in Simonette. Finally, LGN provided preliminary 2024 budget numbers, which indicate 45% production growth over H2/2023. We reiterate our BUY rating and $2.20 target price.
Initial productions for both the 5-11 and 14-33 wells in Simonette significantly exceed expectations and provide justification for increasing the company's H2/23 guidance: LGN first drilled the 5-11 well in North Simonette in July, which was completed in August and began flowback in September. Afterwards, the company drilled the 14-33 well in South Simonette, which was completed and began flowback in September. Since then, LGN has moved a rig and spudded a well in Pouce Coupe, which was recently put on production.
- North Simonette 5-11: The 5-11 was completed with a high intensity frac, with 207 stages across 2,914 horizontal meters. The well averaged 723 BOE/d (69% liquids) in the month of October. As of October 31, 2023, the well had been on production for 65 days. The water cut continues to decline as the well continues to clean up. Importantly, per LNG, the drawdown for October was only ~25% due to downhole pump capacity limits, demonstrating that the well has significantly more inflow potential. The company's experience is that wells in the under-pressured Montney oil play, like North Simonette, can take up to three to four months to reach peak production. Nonetheless, initial production results from the 5-11 well exceeded LGN's previous H2/23 guidance assumptions by 35%. While the production results are early, LGN is encouraged by the results to date and believes that North Simonette will be a highly economical and material play segment for the company going forward.
- South Simonette 14-33: The 14-33 well was completed using a 125-stage frac across 2,974 horizontal meters and is offsetting one of the play's top performing wells ("16-33 Legacy Well'), which was completed in 2017. For the month of October, the 14-33 averaged 1,598 BOE/d (36% liquids). While the initial gas rate is equivalent to that of the best legacy well in the field, its liquids ratio of 87 Bbl/MMcf is ~60% higher than the offsetting legacy well's initial liquids ratio and substantially higher than the average legacy well. Furthermore, initial production results from the 14-33 well exceeded LGN's previous H2/23 guidance assumptions by 81%, with the condensate rate exceeding guidance assumptions by over 145%. To date, the new deeper landing depth and more intense completion are yielding increased condensate production, consistent with LGN's hypothesis.
Updated H2/2023 guidance and 2024 budget (Figure 2): On the heels of the strong well results, LGN increased its H2/23 production guidance from 5,000 BOE/d to 6,000 BOE/d (vs. the Street's 5 MBOE/d estimate), which indicates anticipated production of ~6,600 BOE/d in Q4/23 and CF of $15 million (vs. the Street's $8.7 million estimate). For 2024, the company has approved a budget of $120 million (vs. the Street's $101 million estimate) targeting production to average 8.7 MBOE/d (vs. the Street's 8.6 MBOE/d estimate) allocated as follows: $64 million for DECT at Simonette and Pouce Coupe, $13 million for drilling at Flatrock, $28 million for associate infrastructure, and $15 million for land and contingency.
The 2024 capex budget has been earmarked as follows: 1) Simonette: Plans to drill four 100% working interest wells. The 4-10 three-well pad will be brought on in August, as will one contingency well.
2) Pouce Coupe: Logan plans to drill and bring on-stream a two-well pad, which will fill all available third-party processing capacity. These volume constraints are a near term hurdle, as Logan has secured an additional 40 mmcf/d of transport capacity commencing in 2027.
3) Flatrock: LGN plans to drill its first two wells in 2024, as well as complete and test one of the two wells. The Flatrock capex is why LGN's 2024 capex budget is above our estimate and likely why it is also above the Street's (Figure 3) as opposed to it being related to capital efficiencies.
Our C$2.20 target price is based on a 50/50 blend of 1x risked NAV and 3.75x EV/2024E DACFs. Risks to our target price include commodity prices, cost inflation, rig & crew availability, and asset performance.