Equal Energy Ltd EQU

Wellington West Maintains $10 Target

[scissors14]

Energy

Equal Energy Ltd. (EQU-T, $4.66)

Recommendation: Buy

Kevin Shaw, P.Eng, MBA [phone]; [e-mail]

Ronald Cheung, CFA [phone]; [e-mail]

October 6, 2010

All values in C$ unless otherwise noted.

Current Price (intraday) $4.66

Target Price (12-Month) $10.00*

Implied Capital Gain 115%

Changes

Old New

Production ‘10E boe/d

CFPS (FD) 2010E

Production ‘11E boe/d

CFPS (FD) 2011E

9,513

$1.85

10,262

$2.88

9,183

$1.79

9,700

$2.74

Recommendation Strong

Buy

Buy

Target Price $13.10 $10.00

Company Profile

Equal Energy Ltd. (EQU-T) is an emerging

mid cap O&G company operating in Western

Canada and Oklahoma. Led by a new

management team, Equal is a 50% oil &

liquids weighted trust with current production

of ~9,000 boe/d, 2P reserves of 31.1 mmboe,

and net undeveloped lands of 121,700+ acres.

EQU is focused on horizontal oil

development programs in the Viking,

Cardium, Dina, Circus Viola & Pekisko in

2010.

EQU Ramps Hztl Activity in Viking, Cardium

& Dina w/ Decent Results; Guidance Lowered

? EQU ramps drilling activity in Q3 (as planned) & oil focused in H2/10

5 hztls down (w/ 4 on prod’n) in EQU’s Viking, Dina, and Princess oil

plays in 2H/10; 11 more hztls in Viking, Cardium, Dina & Circus in Q4.

? Hztl results shown in Ex. 1; 2010 guidance now 9,000 – 9,200 boe/d

Even though EQU is increasing its drilling activity steadily, Q3’s exit

prod’n has come in “lite” at ~9,060 boe/d due to a wet Sept & ops delays.

? Dell Chapman (CFO) now in place & brings solid oilpatch experience

Former VP & CFO of Berens Energy which was sold to PetroBakken in

Jan ’10 now joins EQU; Dell has held senior positions w/ Suncor & Gulf.

? Moved to Buy rating & $10* target as EQU repositions for ’11 growth

Forecasts lowered to 9,183 and 9,700 boe/d in ’10 and ’11, respectively;

Trades at ~$25k/flowing boe (~50% oil & liquids) for midcap producer.

* Target based on 40% weight on ’10 NPV/sh. and 60% on ’11 EV/DACF;

Arbitration resolution hearing with Hunton partner scheduled for ~Jan 24, 2011.

Financial Summary

27.6 52-Week Trading Range $3.75-$9.12

$129 Average Weekly Volume 246,098

$114 Market Float ($mm) $126

$243 NAV/share - 2010E $13.30

Forecasts 2008 2009 2010E 2011E

10,283 9,878 9,183 9,700

63% 50% 44% 39%

Modeled WTI Oil Price (US$/bbl) $99.64 $61.78 $79.57 $83.00

Modeled AECO Gas Price (C$/mcf) $8.61 $4.19 $4.27 $5.13

$275.5 $126.8 $151.8 $183.6

Cashflow (C$mm) $97.1 $46.2 $49.5 $75.5

1.8x 3.3x 2.3x 1.4x

$21.3 $21.9 $49.8 $63.8

.34 ($1.90) (
.72) (
.17)

CFPS (FD TSM) $4.62 $2.13 $1.79 $2.74

Valuation 2008 2009 2010E 2011E

$13.23 $11.69 $13.30 $17.21

Recycle Ratio (1P) 0.2x 0.6x 0.6x 1.3x

4.9x 4.4x 2.9x

$24,556 $26,413 $25,006

n/m n/m (26.7x)

8.7x 8.0x 5.6x

2P NPV10 per share

EV/BOE/d (per unit production)

P/E

Enterprise Value (C$mm)

Production (boe/d)

% gas

Oil & Gas Revenues (C$mm)

Net debt / Cashflow

Capex (C$mm)

EPS (FD TSM)

EV/DACF

Target EV/DACF

Shares 2010E O/S (mm, FD TSM)

Market Capitalization (C$mm)

Net Debt - current estimate (C$mm)

Source: Company reports, Wellington West Capital Markets Inc.