Jennings Capital rates QEI speculative buy
Recommendation: SPECULATIVE BUY
QUETZAL ENERGY LTD. 12-Month Target:
.30
(TSXV-QEI C
.11) Risk Rating: ABOVE AVERAGE
FURTHER CLARITY ON CANAGUARO UPSIDE
Canaguaro Update. We have revised our Canaguaro type
curve from our previous 2,500 Bbl/d initial production rate,
declining thereafter to a profile that produces at 2,000 Bbl/d for
18 months.
? Our estimated profile is still lower than the operator’s
production estimate range, with an ESP installed, of
3,000 Bbl/d to 4,000 Bbl/d. We consider our estimate
conservative, given that during a short-period mechanical
operational test of the ESP at Canaguay-1, the well produced
oil at rates in excess of 3,900 Bbl/d.
? The long-term production test will likely produce 2,000 Bbl/d
for its duration (approximately six months); however, the well
could produce 2,000 Bbl/d far after the long-term production
test has been completed, given the electric submersible pump
that was installed has a production capacity of 6,000 Bbl/d
and given no water has been produced to-date – leaving
ample capacity to handle the inevitable water production.
? In addition, one of the partners has indicated that it will likely
employ reservoir management techniques, which we interpret
as maintaining a plateau production level for an extended
period of time – ergo the potential exists to produce at a
plateau level in excess of 2,000 Bbl/d.
? Given the ample capacity, and given that no water has been
produced, we have chosen to model a flat production profile
of 2,000 Bbl/d for 18 months, with production declining at that
point as water production materially begins to alter the
oil/water ratio.
? Based on a 10-well program, with five wells targeting the
Canaguay structure and five wells targeting the identified
structure to the southeast (at a lower chance of success), we
have included a value of US
.11/share in our ExNAV
calculation.
Catalysts. The Canaguay-2 appraisal well should spud mid-
2011 and could be cased and evaluated near the end of Q3/11.
Around the same time, the long-term production test for
Canaguay-1 should be completed and the initial rate of full
production established.
? The first exploration well on LLA-27 in June 2011, located just
to the south of the La Punta block, where three wells have
been drilled on a fault trend that appears to continue into LLA-
27 - the most recent well, was producing 3,377 Bbl/d in one
month, on natural flow.
We reiterate our SPECULATIVE BUY recommendation and
12-month target price of C
.30 per share. Quetzal has
ample catalysts in Canaguaro and Block 27 to drive its share
price up in the short-term.
Sector: OIL & GAS
Analyst: DAVID RICCIARDI, CFA
e-mail: david.ricciardi@jenningscapital.com
Tel: (403) 262-0906 Fax: (403) 262-0904
Associate: JAMES HUMEN, CA
e-mail: james.humen@jenningscapital.com
Tel: (403) 292-9487 Fax: (403) 262-0904
Quetzal Energy Ltd. is a Canadian-based oil producer with
operations in Colombia and Guatemala. The Company’s portfolio
of prospects is weighted toward high-risk exploration, with a recent
success on its 25% W.I. Canaguaro block. Future development at
Canaguaro will assist in funding higher risk exploratory prospects.
https://www.quetzalenergy.com/
Company Statistics
Market Cap $66.1 MM
Basic Shares O/S 600.8 MM
Fully Diluted Shares O/S 893.5 MM
52-Week Range
.10 -
.26
Cash & Cash Equivalents (09/30/10 act.)
Long-term Debt (09/30/10 act.)
Working Capital (09/30/10 act.)
Earnings Summary
FYE: December 2009A 2010F 2011F 2012F
WTI (US$/Bbl) $61.62 $79.50 $95.75 $92.25
Production (Boe/d) 0 0 493 1,637
EPS (US$/FD sh) (
.01) (
.01)
.00
.01
CFPS (US$/FD sh) (
.01) (
.00)
.00
.02
DACF (US$/FD sh) (
.01) (
.00)
.00
.02
Trading Parameters
EV/BOE/d nm nm $118,822 $36,453
P/E nm nm 44.9x 8x
P/CF nm nm 25.6x 5.5x
DACFM nm nm 9.2x 2.0x
-US
.4 MM
US$2.5 MM
US
.0 MM 2
The information contained in this report was obtained from sources we believe to be reliable. We do not represent that such information is accurate of
complete and it should not be relied on as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. Jennings
Capital Inc. and/or employees from time to time may hold shares, options or warrants on any issue included in this report and may buy or sell such
securities. This report is not to be construed as an offer to sell or solicitation to buy securities. Member – CIPF. Jennings Capital (USA) Inc. is a
member of SIPC.
Exhibit 1: Quetzal Target Price
Method Parameter FX Multiple Valuation Weight
Weighted
Valuation
(US$/sh) US$/C$ (C$/sh) (C$/sh)
ExNAV
.32 1.00 1.0X
.32 100.0%
.32
Target Price
.30
Current Price
.11
12-month Gain 173%
Exhibit 2: Quetzal Net Asset Value and Exploration Risked Net Asset Value
Reserves Mix Unit Value
MMBoe % Gas US$/Boe US$MM US$/share
Oil & Gas Assets
(1)
Proved Reserves 0.1 - $23.88 $3.2
.00
Probable Reserves 2.3 - $27.20 $62.0
.07
Total Proved Plus Probable Reserves 2.4 - $27.02 $65.2
.07
Net Cash (Debt) $30.2
.03
Proceeds from warrants and options
.0
.00
Net Asset Value (FD) $95.5
.11
Block Country
Unrisked
Remaining
Resources
Working
Interest
(3)
Net Unrisked
Remaining
Resources
Chance of
Success
MMBoe % MMBoe US$MM US$/share % US$MM US$/share
Canaguaro Colombia 19.3 25.0% 4.8 $119.8
.13 90.0% $100.7
.11
LLA-27 Colombia 9.7 34.3% 3.3 $45.3
.05 35.0% $15.8
.02
LLA-21
(2)
Colombia 5.7 35.0% 2.0 $27.2
.03 25.0% $6.8
.01
LLA-36 Colombia 15.5 14.0% 1.9 $29.6
.03 25.0% $7.4
.01
Total Upside 50.2 12.0 $221.9
.25 $130.8
.15
Proceeds from warrants and options $56.0
.06
Exploration Risked Net Asset Value (FD) $282.2
.32
(1) PV13, after-tax includes the substitution of JCI price forecast.
(2) Estimated, actual resource not disclosed.
(3) Working interests are post-payout.
Risked NPV
Unrisked NPV Risked NPV 3
The information contained in this report was obtained from sources we believe to be reliable. We do not represent that such information is accurate of
complete and it should not be relied on as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. Jennings
Capital Inc. and/or employees from time to time may hold shares, options or warrants on any issue included in this report and may buy or sell such
securities. This report is not to be construed as an offer to sell or solicitation to buy securities. Member – CIPF. Jennings Capital (USA) Inc. is a
member of SIPC.
Exhibit 3: Quetzal Production, Cash Flow and Earnings Forecast
2009A 2010F 2011F 2012F
Production (Bbl/d) 0 0 493 1,637
WTI (US$/Bbl) $61.62 $79.50 $95.75 $92.25
Realized Oil Price (US$/Bbl) na na $86.18 $83.03
Net Revenue (US$MM)
.0
.1 $14.3 $45.8
Operating costs (US$MM)
.0
.0 -$2.7 -$9.0
Exploration expense (US$MM)
.0
.0
.0
.0
G&A (US$MM) -$3.0 -$4.0 -$4.2 -$4.4
Interest expense (US$MM) -
.1 -
.1
.0
.0
DD&A (US$MM)
.0
.0 -$2.7 -$9.0
Stock compensation (US$MM) -
.2 -
.8
.0
.0
F/X & Other (US$MM)
.2
.0
.0
.0
-$3.1 -$4.9 -$9.5 -$22.4
Earnings before taxes (US$MM) -$3.0 -$4.8 $4.8 $23.4
Current (US$MM)
.0
.0 -$1.2 -$3.5
Future (US$MM) -
.8 -
.2
.0
.0
Income taxes (US$MM) -
.8 -
.2 -$1.2 -$3.5
Earnings (US$MM) -$3.8 -$5.0 $3.6 $19.9
(US$/sh, FD) -
.01 (
.01)
.00
.01
Cash flow (US$MM) -$2.8 -$2.7 $6.3 $28.9
(US$/sh, FD) -
.01 (
.00)
.00
.02
DACF (US$MM) -$2.7 -$2.6 $6.3 $28.9
(US$/sh, FD) -
.01 (
.00)
.00
.02
Capital expenditures (US$MM) $2.4 $16.3 $35.0 $30.0
YE Debt (US$MM)
.0
.0
.0
.04
Jennings Capital Inc. Research Disclosures
Company Ticker
Quetzal Energy Ltd. TSXV-QEI
I, David Ricciardi, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I
also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or
views in this report.
Note: We initiated coverage on Quetzal Energy Ltd. on December 13, 2010 with a SPECULATIVE BUY recommendation, an ABOVE AVERAGE risk
rating and a C
.40 target price. Share price at that time was C
.185. On February 7, 2011, we reduced our target price to C
.30. Share price at
that time was C
.135.