LOGAN ENERGY CORP.
Initiating Coverage: No Shortcuts To The Top
Our Conclusion
Logan Energy is a gas-weighted Montney pure-play company offering
growth, consolidation, and inventory depth. We believe that management’s
recent success with Spartan Delta is likely to be repeated with Logan, led by
updated well designs at Simonette, unlocking an infrastructure solution to
support growth at Pouce Coupe, and de-risking well deliverability at Flatrock.
Our net asset value (NAV) demonstrates upside to the current share price on
what we view as achievable well results and capital costs. The stock trades
at a premium valuation of 8.6x 2024E EV/DACF on strip versus peers at
4.1x, which we attribute to management’s recent success at Spartan Delta
and the upside potential in the business. As such, we believe that NAV is a
better valuation methodology for Logan than short-term cash flow metrics.
Logan is one of our top picks among natural gas-weighted producers in our
coverage universe, and as of September 17, we initiate coverage with a
12- to 18-month price target of $1.50/share and an Outperformer rating.
Key Points
New techniques are likely to show potential at Simonette by year-end
2023: The asset has not seen much drilling activity since 2017 and Logan’s
reserve report and historical well deliverability would suggest a lower asset
value versus our estimate. Logan plans to increase the completion intensity
and optimize the landing depth of its Montney wells, which it expects will
drive higher liquids yields and total recovery based on two nearby analog
wells drilled by XTO in 2017. The company owns 60 MMcf/d of processing
capacity through its 50% ownership of the Simonette gas plant, which offers
a clear growth runway on this asset and fixed cost absorption through higher
capacity utilization.
Our upside and downside scenarios demonstrate an attractive
risk/reward profile versus the current share price: In our downside
scenario we assume a 20% higher capital cost, a 20% lower type-curve and
inventory at Simonette, and no value for Flatrock, which computes to an NAV
of $0.77/share (-27%) on our price deck discounted at 10%, versus the
current share price of $1.06. Conversely, our upside scenario computes to
$2.34/share (+121%), which we believe is achievable with multi-well pad
drilling and optimization at Simonette lowering well costs by 20% while
strong productivity would drive an increase to our inventory assumptions on
this asset.
Development at Pouce Coupe is infrastructure constrained, while
de-risking Flatrock is a long-term potential catalyst: An infrastructure
solution at Pouce would be a positive event and could accelerate NAV. In the
near term we expect this asset could double its production level, but would
be constrained beyond that without additional processing capacity. Flatrock
becomes part of the growth stack beyond 2025, but well deliverability is
unknown. We view Flatrock as a potential spin-out candidate following the
eventual divestiture of Logan’s more mature properties.