Canaccord's Daily Letter
Southern Pacific Resource Corp. |
Richard Wyman, MBA, 1.403.508.3886
STP : TSX-V : C$1.17 | C$114.2M | Speculative Buy , Target C$3.00
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Closing of financing, revised estimates, reduced target price
Event
Research restriction has been lifted upon closing of the recent equity financing. Southern
Pacific raised $63.0 million by issuing 27.3 million common shares at $1.83 per share and
5.9 million flow-through shares at $2.21 per flow-through share. In addition, the company
released first quarter results.
Impact
Mixed. On the positive side, Southern Pacific is now funded to execute an aggressive
drilling and seismic program this winter to further define the bitumen resources on its
acreage and to support a pilot SAGD project. On the negative side, the error of the reserves
evaluator with regard to overstated working interest has hurt the share price.
Action
We maintain our SPECULATIVE BUY recommendation, but have reduced our 12-month
target price to C$3.00 to reflect the impact of equity dilution from the recent financing and
corrected interest in probable and possible reserves at Leismer. Our target price is based
on a risk-adjusted, contingent asset valuation of ultimately achieving 100,000 b/d from
SAGD projects on Southern Pacific’s five areas.
Valuation
Southern Pacific trades at about 41% of the estimated contingent asset value of $2.85,
which is based on conservative commodity price assumptions. Using long-term futures
strip prices of US$84/bbl for West Texas Intermediate crude oil, the estimated contingent
value of Southern Pacific increases to about $6.00 per share.