RJ on CENBorrowed from another poster
Last week, the company reported 4Q05 financial and operating results with actual average
production of 4,974 boepd (65% natural gas) which was within 1% of our forecast of 5,000
boepd. Reported CFPS (f.d.) of $0.29 (or $15.7 million) was 16% lower than our published
estimate of $0.35 ($18.7 million), primarily due to higher-than-expected operating costs. We
expected much better operating cost performance in the quarter resulting from the
concentration of increased production from oil wells at Cecil (also called Clear River,
Alberta). Actual operating costs in 4Q05 were $10.32 per boe compared to our assumption of
$8.75. Production was higher from these Cecil oil wells in 4Q05 as a result of the Alberta
holiday on MRL (maximum rate limitations) in response to Hurricane Katrina. With Clear's
current production estimated at 4,000 boepd (20% lower than 4Q05 average), we have
lowered our 2006 forecasts to account for the lower production growth in the short run. The
company stated that it has 2,250 boepd to come on production by May 2006 when total
production is expected to reach 6,000 boepd. Our understanding is that at least 800 boepd
(36% of the total) is to come from Cecil, subject to EUB approval for GPP, which we agree
may be imminent. Thus, we remain optimistic for a recovery of production growth in the back
half of 2006. Due to lower production in 1Q06, our 2006 average production forecast drops
13% from 6,003 to 5,200 boepd, and CFPS (f.d.) drops 14% from $1.09 to $0.94. Production
per share fell 5.8% in 2005 and the majority of the production growth in 2005 was offset by
higher-than-average production declines. The reported drop in reserve life index in 2005
indicates the situation is unlikely to improve in 2006. Reported proven reserve F&D costs
were also higher than the average 2005 cash netback, resulting in a proven reserve recycle
ratio (RRR) of 0.7 (0.8, for 2P) which (so far as we have seen) are the lowest RRRs for any
company of this size. With gas prices in 2006 forecast to be lower than 2005, a marked
improvement in proven reserve F&D costs would have to occur for this performance measure
to improve. Meantime, we are revising our OUTPERFORM investment rating to MARKET
PERFORM and reducing our target price from $5.75 to $5.25 based on a 3.4 times debt-adjusted
cash flow (EV/EBITDA) multiple to our 2007 forecasts.