Main argument:
We are launching coverage of LGN with a BUY rating and a C$2.20 target price based on a 50/50 blend of 1x risked NAV and 3.75x EV/2024E DACFs. LGN is the 4.5 MBOE/d spin-out from SDE (BUY; TP: C$7.00). Its assets are comprised of 4 MBOE/d in the Pouce Coupe and Simonette areas of north-west Alberta, 500 BOE/d of legacy north-east British Columbia production, and 55,769 net undeveloped acres in the Flatrock area of north-east British Columbia. Our BUY rating is based on:
LGN is a highly differentiated company by virtue of its ability to generate significant growth and get rewarded for it. The company is targeting organic growth of over four times to about 20 MBOE/d in less than five years. The key is that there has been little to no capital deployed on LGN's asset base as SDE was largely focused on the development of its oil-weighted Montney assets. We estimate that LGN has the inventory and wherewithal to generate 40-50% average annual production growth with liquids weighting to grow from the current 24%. This is supported by over 500 identified drilling locations that lie across 193,000 net acres of liquid-rich natural gas Montney lands held at an average 95% w.i. The company also has a 50% w.i. in the 120 MMcf/d 13-11 Simonette gas plant, which has ~80% of unutilized capacity, all of which is available to LGN.
We see upside potential in the guidance as LGN is not accounting for improvements from more modern drilling & completion techniques. The company's near-term guidance assumes conservative cost and well performance. As we show in this report, testing more modern completion techniques should yield increased production growth expectations, in our view. To that end, even when using a blend of modern and legacy type curves, we are almost 15% and 10% above Consensus 2024E and 2025E production, respectively.
LGN has the balance sheet strength to provide top-tier per share growth. One concern of investors is that while a company might be able to generate significant production growth, it can come at the cost of skyrocketing debt. To the contrary, even at US$50/Bbl WTI oil and STRIP natural gas prices, we see Logan's net debt/CF remaining below 1x over the next three years. As a result, for 2024, we forecast over 145% debt-adjusted cash flow per share growth and about 50% debt-adjusted production per share growth, which are amongst the best in our coverage. It is important to note that right out of the gate, LGN has $109 million in cash (assuming exercise of all warrants) and no debt.
What's the end game? We expect LGN to eventually sell itself. However, one does not need to buy LGN on takeout spec due to the strong fundamentals, in our view.
We are confident of LGN's ability to deliver, as the company is comprised of key members of the former SDE management team. The company is led by Rick McHardy, as President & Chief Executive Officer, and Brendan Paton, as Vice President of Engineering and Chief Operating Officer. Additionally, LGN is comprised of the high-quality Velvet team, which is, in our view, one of the most technically proficient teams on the Montney. Finally, management is much incentivized as it owns over 20% of basic shares outstanding. Overall, insiders own about 31% of fully diluted shares.
Acquisition note:
Just as with its predecessors, we see LGN using opportunistic acquisitions to accelerate growth. To that end, Figures 14 and 15 provide potential targets. We would note that we see KEL-T as a takeout target, and if that happens, given the location of LGN to KEL's properties as shown in Figure 14, we anticipate a re-rate in LGN's valuation on a follow-on expectation if it is done at a premium.
I would have never guessed Kelt as an acquisition target as IMO it's far too big in the short-term. Kelt is a 40k boepd gas producer and that would probably be $1.5b+. I disagree with Kelt, but doesn't mean there isn't other potential takeover targets on a much smaller scale in the area. To name a few examples: i3 Energy and Concourse Petroleum would be nice tuck in acquisitions with natural synergies.