GMP view on Twin ButteFebruary 19th, 2010
SUBJECT: Twin Butte updated presentation
DETAILS: Twin Butte (TBE) has posted an updated corporate presentation to its website and can be found at https://www.twinbutteenergy.com/pdfs/TwinB_Presentation.pdf . The company has an active marketing schedule planned for the next two weeks (Toronto, Montreal, Winnipeg next week, New York, Boston, Chicago/Milwaukee the week after that) to highlight its refocused asset base and this could lead to increased interest in the stock. We note a couple key highlights of the presentation below.
1.Slide 5 NAV – TBE announced its year-end reserves earlier this week, and the valuation highlights strong NAV support above current levels. The slide highlights the NAV both pre- and post the January equity financing, and even under the most conservative assumptions this stock is trading at a discount to this year-end NAV (ie: using a 15% discount rate rather than our typical 10% the NAV would still be $1.90/share compared to the current trading price in the $1.35 - $1.40 range).
2.Slide 7 – After some non-core dispositions TBE essentially highlights two core focus growth areas: Alberta Plains which include a mix of oil and natural gas targets, and West Central Alberta which features the company’s emerging Deep Basin focus. A criticism in the past has been the company’s scattered asset base which we believe has been cleaned up and refocused over the past few months.
3.Slide 14 heavy oil economics – This builds upon one of the themes from our oil resource report earlier this year, highlighting the compelling economics for conventional heavy oil production in western Canada. The slide highlights a recycle ratio > 4.0x at US$75/b WTI due to the narrow heavy oil differentials, and this doesn’t even include the impact that improving technology is having on heavy oil development. The key takeaway is that we believe there is strong upside potential from heavy oil development in the current environment, and TBE is well positioned to capitalize with 20 – 25% of its production at this Frog Lake heavy oil property.
4.Slide 15 heavy oil resource potential – While this is not high profile resource potential that we see with some of the other producers in our universe, the potential here could still be significant. There is an estimated 350 mmb of OOIP on TBE’s land position of which 12.3 mmb has been recovered to date (3.5% recovery factor). Just getting to 10% would imply an incremental 22.7 mmb of recoverable reserves, and with improving technology and the potential for multi-zone recompletions, the upside could be even greater. So the resource potential here is significant, even if it isn’t the Cardium or the Bakken or some of the other higher profile plays.
5.Slide 18 potential low cost gas resource potential – Another potential emerging resource play is at Bruce, where the company has 40+ sections of land prospective for Viking and Colorado shale natural gas. These are shallow depth opportunities (500 – 700 m) so the horizontal well costs will be cheap at $1.3 mm, and the prize could be substantial with OGIP of 5 bcf/section in the Viking and 20 bcf/section in the Colorado shales. TBE will test the productivity of these horizons with horizontal wells and multi-stage completions in 2010, and success could lead to strong reserve growth and unlock a new resource opportunity for the company.
6.Slide 20 Deep Basin multi-zone natural gas – TBE has also been establishing an inventory of multi-zone natural gas opportunities in the Ansell region of the Deep Basin. These would be higher impact targets (Cardium gas with Peyto, Notikewin channels offsetting VRO’s drilling success) and initial operations are planned here in 2010 (although at current gas prices the economics are not as strong as on its oil-focused drilling targets).
SUMMARY: We believe this management team led by Jim Saunders has done a good job of cleaning up this asset base and getting the company focused on higher quality assets going forward. TBE has been an overlooked story in our view which accounts for the deeply discounted valuation levels, but with the refocused asset base and the improved financial flexibility we believe the company is positioned for stronger performance in 2010 and belongs on the radar screens for more institutional investors.
Slide 20 Deep Basin multi-zone natural gas – TBE has also been establishing an inventory of multi-zone natural gas opportunities in the Ansell region of the Deep Basin. These would be higher impact targets (Cardium gas with Peyto, Notikewin channels offsetting VRO’s drilling success) and initial operations are planned here in 2010 (although at current gas prices the economics are not as strong as on its oil-focused drilling targets).
Slide 18 potential low cost gas resource potential – Another potential emerging resource play is at Bruce, where the company has 40+ sections of land prospective for Viking and Colorado shale natural gas. These are shallow depth opportunities (500 – 700 m) so the horizontal well costs will be cheap at $1.3 mm, and the prize could be substantial with OGIP of 5 bcf/section in the Viking and 20 bcf/section in the Colorado shales. TBE will test the productivity of these horizons with horizontal wells and multi-stage completions in 2010, and success could lead to strong reserve growth and unlock a new resource opportunity for the company.
Slide 15 heavy oil resource potential – While this is not high profile resource potential that we see with some of the other producers in our universe, the potential here could still be significant. There is an estimated 350 mmb of OOIP on TBE’s land position of which 12.3 mmb has been recovered to date (3.5% recovery factor). Just getting to 10% would imply an incremental 22.7 mmb of recoverable reserves, and with improving technology and the potential for multi-zone recompletions, the upside could be even greater. So the resource potential here is significant, even if it isn’t the Cardium or the Bakken or some of the other higher profile plays.
Slide 14 heavy oil economics – This builds upon one of the themes from our oil resource report earlier this year, highlighting the compelling economics for conventional heavy oil production in western Canada. The slide highlights a recycle ratio > 4.0x at US$75/b WTI due to the narrow heavy oil differentials, and this doesn’t even include the impact that improving technology is having on heavy oil development. The key takeaway is that we believe there is strong upside potential from heavy oil development in the current environment, and TBE is well positioned to capitalize with 20 – 25% of its production at this Frog Lake heavy oil property.
Slide 7 – After some non-core dispositions TBE essentially highlights two core focus growth areas: Alberta Plains which include a mix of oil and natural gas targets, and West Central Alberta which features the company’s emerging Deep Basin focus. A criticism in the past has been the company’s scattered asset base which we believe has been cleaned up and refocused over the past few months.
Slide 5 NAV – TBE announced its year-end reserves earlier this week, and the valuation highlights strong NAV support above current levels. The slide highlights the NAV both pre- and post the January equity financing, and even under the most conservative assumptions this stock is trading at a discount to this year-end NAV (ie: using a 15% discount rate rather than our typical 10% the NAV would still be $1.90/share compared to the current trading price in the $1.35 - $1.40 range).