$12.50 target from BMO!!!!
October 31, 2008
Research Comment
Calgary, Alberta
Kent Porteous, P.Eng.
Event
Vero reported Q3/08 CFPS of $0.50, generally in line with our estimate of$0.54. Production averaged 6,236 boe/d, slightly above our forecast of 6,183 boe/d. However, higher production levels were offset by lower realized naturalgas pricing due to the timing of outages during the quarter. The company drilled8 (5.3 net) wells with a 91% success rate in Q3/08. Vero plans to drill a total of 38 wells in 2008. Vero also announced that it has entered into an agreement to acquire a private company for consideration consisting of Vero shares. Theacquisition adds ~800 boe/d in Vero’s Edson core area. As a result, Vero hasincreased its 2008 exit guidance to 8,400-8,800 boe/d from 7,600-8,000 boe/d.
Impact
Neutral.
Forecasts
Reflecting the acquisition timing and production guidance for Q4/08,we have maintained our 2008 production forecast of 6,400 boe/d. We have increased our 2009 production forecast to 9,200 boe/d (up 600 boe/d) to reflect the volumes from the acquisition. With minor changes to our operating assumptions and theimpact of shares issued for the acquisition, our CFPS estimates have fallen slightly to $2.45 from $2.46 in 2008 and to $2.46 from $2.52 in 2009.
Valuation
Vero currently trades at 2009E valuation multiples of 2.5x P/CFPS and 3.2x EV/EBITDA, which are in line with the Conventionalpeer group medians. We believe that Vero should trade at a premium to its peers givencontinued solid operating results and success at Edson. Our target price of $12.50 reflects thisimproved valuation and implies 5.1x 2009E CFPS.
Major Shareholders: Management & Directors (11.0%)
First Call Mean Estimates: VERO ENERGY INC (C$) 2008E: $0.83; 2009E: $0.67
Recommendation
We continue to rate Vero Outperform and view it as a core junior holding.