Southern Pacific Resource Corp STPJF

Comment

[Box927]

Southern Pacific Resource (STP : TSX-V : $1.17) - Speculative Buy - Target:
C$3.00
Richard Wyman
Comment: Closing of financing, revised estimates, reduced target price

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. 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. 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. 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.