In reviewing management performance of Ithaca’s peer group of junior
international E&P companies over the last five years, there were two notable
failures of companies that were further along the road to developing selfsustaining
production and cash flow. Ithaca, however, not only weathered the
stormy depths of the financial crisis, but has come out ahead of most of its
surviving peer group in terms of production, cash flow and self-financing
capability. Management has been focused on securing the financial strength and
viability of the Company, concentrating all their efforts, as of late, to developing
their discoveries and maximizing early cash flow. Exploration activities are
expected to resume once they can be fully funded from cash flow.
With over $50 million in cash, cash flow of over US$112 million this year and
US$154 million in 2011, and a US$140 million lending facility, the Company has
over $455 million of capital over the next two years to fund a series of low-risk
development projects to maintain a growing production profile. The production
capability of the current reserves allows for sustained growth - the current
reserve life index is 8.6 years on proven reserves, somewhat higher than the
norm for the industry. The index rises to 11.4 years on proven and probable
reserves.Management continues to pursue new opportunities, and as their stock price has
grown, Ithaca’s shares represent a relatively strong currency, one that allows the
Company to make accretive deals when adding to its inventory of projects.
Our target of $4.00 is well supported by asset value – there is a large gap to close,
and over time, stocks that are mispriced tend to trade to the value of their assets.
The target is a 5.6 times multiple of this year’s cash flow and 4.0 times our 2011
estimate.
We recommend purchase of Ithaca Energy Inc. shares with a STRONG BUY
recommendation and a target of $4.00, believing Ithaca to be one of the primary
growth vehicles in the sector over the next four years.