VIRGINIA HILLS OIL CORP VFGGF

Canaccord report highlights July 9

[Iching64]

Hi Curlews,

OK here are some highlights.

"PRY - building for the long term -  speculative buy one year target $1.25 - impressive land position - upside potential if waterflooding successful.

Positives

big resource provides room for growth
- waterflood potential
- valuation discount to peers (40% to 60 %)
-step out wells - potential for success in new drilling areas
-proven management team

Risks

-decline rates and capital efficiency  ( decline rates and capex should normalize as production matures)
-relative to peers, high debt ( but still manageable)
-pure play asset base
-commodity prices

Recent Events

-failed spartan deal and high capital overspend in Q4/12 caused recent share price collapse
-field operations impressive - production up sharply, initial waterfloods have good results

Developing a Resource

-early days for PRY  ( 2010 to 2012)
-large decline reates are typical for an early stage resource play -  should "dissipate" over time

Production forecast

-99 % light oil, high netbacks
-production has risen on a per share basis and will continue
-reserves doubled in 2012 ( up 76 % on a per share basis)

Balance sheet Strenght

-PRY should be able to fund 2013 CAPEX program from cashflow and banklines ( i.e. no new share  dilutions)
-high net backs and economies of scale due to single resource play
-$88 million cash flow in 2013
-debt is high relative to peers

Valuation

-based on 2P reserves NAV   $1.34
-base NAV  $1.06
-success in waterflooding could add $1.20 in value
-for a target of $2.34".

It seems to me that Canaccord is not too worried about the debt levels as they see that in a new resource play the Capex will  be very high at first, then moderate as the resource becomes developed, and  cash flow and net earnings start to increase.

Also, it is clear that, even though their analysis of the  initial waterfloods is positive, they clearly believe that it is too early to make a call on how successful the waterflooding will be -  so this is the big unknown  that could be the "catalyst" for the stock.


I hope I have given an accurate summary of the report.