Bowood Energy Inc V.BWD

RE: RE: RE: GMP Securities

[casey161]

Here ya go!

Bowood Energy Inc. 1 (BWD-T) BUY Last:
.39 Target: $1.15

Initiating coverage on Emerging Alberta Bakken Player

With its recently announced deal with the Blood Tribe, which added 60,640 net contiguous acres, Bowood now has exposure to roughly 115,000 net acres on the emerging Alberta Bakken trend where the industry has shelled out $125 million in land sale bonuses for over 220,000 Crown acres so far this year. This likely makes Bowood the best levered company on the play. 

 

Unrisked reserve upside of 270 million barrels

Based on estimates of 10 million barrels of original oil in place we estimate that Bowood is exposed to roughly 270 million barrels of unrisked recoverable reserves.  Taking into account the higher than average risk associated with this play (due to lack of well control and production history in the area) and the likelihood that Bowood will have to farm-out its interest to help fund the development of its lands, we estimate the risked value at $1.04 per share on this play.

 

Target Valuation

Given the upside exposure that we now see on the Alberta Bakken play we calculate the value of the company between $1.15 to $1.70. Our target is based on the more conservative approach of risking the estimated OOIP’s of 10 mmbbls per section to generate $1.04/share in value. We value the existing production base at
.10 per share.

 

Recommendation

We are initiating coverage with a BUY recommendation and a target price of $1.15 per share.

Initiating coverage on Emerging Alberta

Bakken Player

Exposure to exciting new oil play in southern Alberta

With its recently announced deal with the Blood Tribe, which added 60,640 net

contiguous acres, Bowood now has exposure to roughly 115,000 net acres on the

emerging Alberta Bakken trend where the industry has shelled out $125 million in

land sale bonuses for over 220,000 Crown acres so far this year. This likely makes

Bowood the best levered company on the play.

Unrisked reserve upside of 270 million barrels

Based on estimates of 10 million barrels of original oil in place we estimate that

Bowood is exposed to roughly 270 million barrels of unrisked recoverable reserves.

Taking into account the higher than average risk associated with this play (due to

lack of well control and production history in the area) and the likelihood that

Bowood will have to farm-out its interest to help fund the development of its lands,

we estimate the risked value at $1.04 per share on this play.

Target Valuation

Given the upside exposure that we now see on the Alberta Bakken play we

calculate the value of the company between $1.15 to $1.70. Our target is based on

the more conservative approach of risking the estimated OOIP’s of 10 mmbbls per

section to generate $1.04/share in value. We value the existing production base at

.10 per share.

Recommendation

We are initiating coverage with a BUY recommendation and a target price of $1.15

per share.

Peter Doig, CFA Associate: Nick Corcoran

[e-mail] [e-mail]

403-543-3035 403-543-3561

INITIATING COVERAGE ON BWD FOLLOWING $22.0 MILLION FINANCING

Company Profile

Bowood Energy Inc. is currently listed on the TSX Venture Exchange under the symbol BWD. Bowood

had been operating as a private company for approximately five years before amalgamating with

Roadrunner Oil & Gas Inc. in December 2009, which gave them a vehicle to go public. The management

team is led by Robert Mercier, P. Eng, who has over 20 years industry experience with a number of firm’s

including Forte Resources, Avalanche Energy, Colony Energy and Petrobank and he is supported by a

strong technical team. Current production is roughly 550 boe/d (90% gas), but the focus of the company

going forward will definitely be directed towards the emerging Alberta Bakken light oil play in southern

Alberta where they now have exposure to approximately 115,000 net acres on this trend.

Bowood’s core assets are focused in Southern Alberta where the company set up exploration and

development plays in shallower horizons targeting low to medium risk plays with multi-zone potential.

Through strategic acquisitions of shallow gas production which held all P&NG rights and more recent

freehold deals, the company had established roughly 43,000 acres (100% W.I.) just south of Lethbridge

before the gold rush for the Alberta Bakken play ramped up earlier this year. Bowood has subsequently

worked a deal with the Blood Tribe First Nation to acquire an additional 60,640 acres on this trend and

continues to acquire freehold acreage. As a result of a successful land acquisition strategy, Bowood’s

total land holdings are currently 115,000 acres (100%). While we expect the Bakken play will be the

driving force behind the stock over the next few years, the company has also established an interesting

low risk gas resource play in the greater Armada area of southern Alberta.

Bowood Closes $22.0 Million Financing

Concurrent with the Blood land deal, Bowood filed a prospectus to sell a minimum of 60.0 million and a

maximum of 80.0 million shares at a price of
.25 per share for gross proceeds of between $15.0

million and $20.0 million. As this deal was oversubscribed, the upper end of the financing was reached

and the over-allotment of an additional 8 million subscription receipts were placed, increasing the total

gross proceeds to $22.0 million. Post the land payments to the Blood Tribe and net proceeds of the

deal, we now estimate that the company will exit 2010 with
.4 million of net debt on a bank facility of

$8.0 million. Given that the Bakken wells in this area are expected to run north of $4.0 million, it is

obvious that Bowood will need to bring in a partner to help fund the exploration and development of the

play as the cash flow generation from a 1,000 boe/d base will not be sufficient to fund this venture. We

expect that any farm-out agreement will result in Bowood being carried on the majority of the costs

associated with this play.

Bowood’s Alberta Bakken Exposure

Following its recently announced deal with the Blood Tribe First Nation, Bowood now has exposure to

approximately 115,000 net acres (46,500 hectares) in the heart of what is expected to be the main

fairway. The Blood deal gives Bowood access to 60,640 acres of contiguous lands at the northeast

corner of the Blood lands (near the city of Lethbridge). Bowood picked up these lands for an upfront

consideration of $14.1 million or an average price of $233/acre, which is less than half of what the

average land sale price has been on the trend so far this year. Bowood’s good working relationship

with the Blood Tribe and the fact that the Tribe owns 5.7 million share of Bowood, definitely gave the

company a leg up when negotiating the deal. Bowood was also able to pick the lands closest to the

Peter Doig, CFA Associate: Nick Corcoran

[e-mail] [e-mail]

403-543-3035 403-543-3561

Indra well on the Blood lands at location 10-30-8-23W4. This well was drilled vertically in 1979 by

Kaiser Oil (now operated by Indra O&G). The well had a first month average rate of over 330 bbl/d of oil

and is still doing ~10 bbl/d, with cumulative production of over 242,000 barrels. Using this well to initiate

its exploration program will give Bowood a big advantage compared to the other producers on the play

who have little to no well control for Upper Devonian oil production in the area. The terms of the five

year lease include a $5.00/hectare annual rental fee (approximately $122,000/year) and a commitment

to drill a minimum of at least one well in each of the first two years and two wells per year for the

remaining three years. The Tribe will also have the right to elect, in advance of drilling, to participate for

a 20% working interest in any wells on the lands. If the Tribe does not elect to participate, they can still

get a 20% interest in the well but only after Bowood has recovered 200% of the total capital costs.

Bowood also has exposure to roughly 54,400 net acres of deep rights on the fairway to the south and

north of the Blood lands. The company also has a good relationship with some of the big ranches in

the area, which control large tracks of freehold mineral rights. Bowood’s lands on the Magrath and

McIntyre blocks look to be on trend with the play. The 2-16-3-21W4 key well in the area is at the south

end of the McIntyre block (see map below) and it DST’ed 315 meters of oil form the deeper horizons.

Bowood holds most of this land by way of shallow drilling and production, so there will be no major

retention issues in the coming years to hold its deep rights in the fairway.

Bowood’s Alberta Bakken Land Position

Source: Company reports

Peter Doig, CFA Associate: Nick Corcoran

[e-mail] [e-mail]

403-543-3035 403-543-3561

GMP ESTIMATES

GMP Estimates

Our 2010 and 2011 forecasts are summarized below. For 2010, we are assuming $21.0 million of total

capital expenditures (including the Blood land deal) which results in forecast average production of 610

boe/d (73 b/d of oil and NGLs and 3.2 mmcf/d of natural gas). Our production forecast results in

estimated CFPS (f.d.d.) of
.00 and a year-end net debt estimate of
.4 million (post financing) on a

bank facility of $8.0 million.

For 2011, we expect a continued push to grow on the oil and liquids side helping to push our production

forecast up to an average of 1,100 boe/d (28% oil and NGLs). We are assuming a $12 million capital

spending program with $7.3 million of internal cash flow. We expect some capital will obviously be

directed towards the emerging Alberta Bakken development, but have not incorporated any production

from this activity due to the exploratory nature of the play. This results in forecast CFPS (f.d.d.) of

.02 and year-end net debt of approximately $5.1 million or 0.7x trailing cash flow. We also note

these estimates do not incorporate any future acquisition activity.

Forecast Summary

2009A 2010E 2011E

Production

Oil & NGLs (b/d) 53 73 308

Natural gas (mmcf/d) 3.3 3.2 4.8

Equivalent (boe/d) 598 610 1,100

% Oil & NGLs 9% 12% 28%

Financial

Net income ($mm) ($5.6) ($3.8) ($2.6)

EPS (basic) (
.38) (
.02) (
.01)

EPS (f.d.) (
.38) (
.02) (
.01)

Cash flow ($mm)
.8 $1.0 $7.3

CFPS (basic)
.05
.00
.03

CFPS (f.d.d.)
.05
.00
.02

Capital spending ($mm)
.8 $21.0 $12.0

Net debt ($mm) $12.1
.4 $5.1

Debt/cash flow 14.9x 0.4x 0.7x

Source: Company reports, GMP Securities

Peter Doig, CFA Associate: Nick Corcoran

[e-mail] [e-mail]

403-543-3035 403-543-3561

VALUATION

Valuation Benchmarks – Reflecting only a small fraction of the upside potential

from the Alberta Bakken play

Bowood currently has a market capitalization of $107 million. The stock has rallied over 290% since

hitting a low of
.10 earlier in the year and 56% just in the last couples of weeks, on the back of the

excitement surrounding the Crown land sales and announcements that Murphy Oil and Crescent Point

are now involved in the Alberta Bakken play. We continue to see further upside in the story.

Our valuation parameters are based on the September 24th closing price of
.39. Bowood is

obviously trading at a big premium to the small cap producers average on every measure, but we still

see significant upside potential in the story as the stock in nowhere close to reflecting the huge reserve

and production growth that could materialize in this story over the next few years if this play develops

even close to the way we think that it will.

Based on estimates of 10 million barrels of original oil in place we estimate that Bowood is exposed to

roughly 270 million barrels of unrisked recoverable reserves. Taking into account the higher than

average risk associated with this play (due to lack of well control and production history in the area) and

the likelihood that Bowood will have to farm-out its interest to help fund the development of its lands, we

estimate the risked value at $1.04 per share on this play. Based on the recent Enerplus deal for North

Dakota based Bakken assets we see the value just for BWD’s Bakken assets as high as $1.61/share.

Given the value of
.10/share for BWD’s existing producing assets, we calculate the total value of

BWD at between $1.15 to $1.70 per share. Our target price is based on the more conservative of these

two valuation approaches.

Bowood Valuation

Source: Company reports, GMP Securities

Peter Doig, CFA Associate: Nick Corcoran

[e-mail] [e-mail]

403-543-3035 403-543-3561

RECOMMENDATION

With the Crown land now all wrapped up on the Alberta Bakken trend just south of Lethbridge, we

think that Bowood’s exposure with 115,000 net acres (including the recently announced Blood

Tribe land deal) on the play along with their strong relationship with both the Blood and other large

freehold land owners in the area will prove to be valuable assets at the end of the day. We view

the Blood land deal as a solid strategic move to wrap up more land on the play before larger

producers like Murphy and Crescent Point scooped it up. We also like the Blood lands that

Bowood picked up due to there proximity to the existing producer which has already produced over

240,000 barrels from likely the Big Valley formation. We view this as the least risky place on the

whole trend to initiate an exploration program, and this likely gives Bowood a leg up over its

competitors as a result. We view this as an exiting and definitely leveraged way to invest in this

new resource play and we are therefore initiating coverage with a BUY recommendation and $1.15

per share target price, which indicates potential upside of 195% from current levels.