Nice update by TD Waterhouse
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Riptor
Petrodorado Energy Ltd.
(PDQ-V ) C
.24
Talora Farm-Out Reduces Financing Requirements
Event
Yesterday (shortly after market open) Petrodorado Energy Ltd. (PDQ-V)
announced that is has farmed out 30% of its working interest in the Talora
Block in Colombia.
Impact
SLIGHTLY POSITIVE.
Details
Petrodorado has signed a definitive agreement with Drift Lake Resources
(DLA-V, Not Rated) to farm out 30% of its 95% working interest in the
Talora Block (reducing Petrodorado’s working interest to 65%). Drift Lake
will make an initial cash payment of $5.2 million to Petrodorado, and will pay
60% of the cost of a first exploration well (up to $3.9 million) and 45% of the
second well (up to $2.925 million).
Assuming the spending caps are reached and without discounting the value of
future farm-in carries, the total equivalent cash value implied by this deal is
approximately $8.1 million for the 30% interest being acquired, or $27
million for the whole Talora block (100%). This suggests that our valuation of
the Talora block (at 100%) of over $100 million on a fully-risked basis
(assuming a 13% chance of 54 mmBOE that could be worth approximately
$20/BOE) is significantly higher than what Petrodorado could monetize the
asset for at this point in time. However, we would not expect industry to pay
full value in this type of farm-in deal and are comfortable leaving our
assumptions unchanged for now (while highlighting that current market
conditions mean it is unlikely that stocks will trade close to Fully-risked
NAVPS in the near term).
Petrodorado is waiting on environmental permits – expected in mid-
September – to begin drilling its next exploration well on the block, which is
likely to target oil in the Caballos Formation in the Dorado prospect.
Outlook
Why we think that the deal is slightly positive (despite an implied
valuation significantly below our modeling of the asset): Given currently
weak equity markets, combined with very limited cash flow being generated
Energy Producers - Internationals
Recommendation: SPEC. BUY
Unchanged
Risk: SPECULATIVE
12-Month Target Price: C
.90
Unchanged
12-Month Total Return: 275.0%
Market Data (C$)
Current Price
.24
52-Wk Range
.19-
.77
Mkt Cap (f.d.)($mm) $166.2
EV ($mm) $81.5
Dividend per Share --
Dividend Yield --
Avg. Daily Trading Vol. (3mths) 351906
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 692.3
Shares O/S (basic)(mm) 482.1
Float Shares (mm) 380.6
Net Debt ($mm) ($34.2)
Net Debt/Tot Cap nmf
Estimates (US$)
Year 2009A 2010A 2011E 2012E
CFPS (f.d.) nmf (0.01) 0.01 0.04
Oil (b/d) 0 52 259 1,014
Gas (MMcf/d) 0 0 0 .04
MBOE/d 0 0.05 0.3 1.0
Valuations
Year 2009A 2010A 2011E 2012E
EV/DACF nmf nmf 21.9x 8.3x
Supplemental Data (US$)
Year 2009A 2010A 2011E 2012E
WTI (US$/bbl) $61.85 $79.45 $95.00 $95.00
Base NAVPS -- -- C
.09 --
Risked NAVPS -- -- C$1.09 --
All figures in US$, unless otherwise specified.
Jamie Somerville Danny Yick, P. Eng. (Associate)
Action Notes August 19, 2011
Equity Research 6 of 17
by Petrodorado, the company needed to divest some of its non-core assets or raise additional financing to
secure the capital required to explore and appraise its portfolio of assets in Latin America (that are generally
focused on large resources with relatively long lead times to potential cash flow generation). This deal has
significantly increased our expectations for 2011 year-end net cash position, significantly reducing the risk of
Petrodorado running out of cash prior to completing drilling of high impact exploration wells on the CPO-5
and Talora blocks.
In a recent analysis of potential catalysts in the International E&P sector, we had cautiously assumed that
drilling of the Dorado prospect at Talora would be delayed until 2012 if Petrodorado could not secure a
partner. With the well now likely to be drilled during Q4/11, we see more than twice the upside potential from
catalysts through H2/11 than we did previously. The Dorado prospect could hold 35 mmbbl of recoverable oil
(at 100% WI), such that a successful discovery could be worth C
.50 per share to Petrodorado (despite its
working interest being reduced following the farm-out).
Management had previously indicated that it was seeking to farm out or divest non-core interests. The fact that
one deal has been sealed gives us increased confidence that the company can further reduce the need for
additional financing with additional divestments. Although we believe the company is nonetheless likely to
require additional financing during 2012, this deal extends the number of exploration wells Petrodorado will
drill before it has to come to market, as well as the time it can take for a recovery in equity markets.
Estimate Changes: Our Base NAV has increased by 31% mainly due to a larger cash position expected with
the $5.2 million cash payment (as well as a reduction in spending commitments associated with near-term
drilling). However, our Fully-risked NAVPS has decreased slightly as we value the asset significantly higher
than the consideration implied by the farm-out agreement.
Exhibit 1. Petrodorado: TD Securities Estimate Changes
Q1/11A
New New Old % Chg New Old % Chg
Production (BOE/d) 128 254 259 270 (4%) 1,014 1,132 (10%)
% Natural Gas 0% 0% 0% 0% nmf 1% 1% nmf
Financial ($mm)
Cash Flow ($1) $1 $4 $4 (6%) $18 $21 (12%)
Capex $12 $10 $36 $45 (20%) $89 $100 (11%)
Ending Net Cash / (Debt) $47 $38 $26 $17 52% ($44) ($61) (28%)
CFPS - f.d.
.00
.00
.01
.01 (6%)
.04
.04 (12%)
Netbacks ($/BOE)
Revenue
.00 $99.40 $86.63 $87.13 (1%) $88.55 $89.09 (1%)
Royalties
.00 ($6.20) ($5.39) ($5.50) (2%) ($6.74) ($6.81) (1%)
% Revenue nmf 6% 6% 6% (1%) 8% 8% (1%)
Opex
.00 ($18.16) ($18.67) ($18.37) 2% ($13.35) ($12.91) 3%
Operating Netback
.00 $75.03 $62.58 $63.26 (1%) $68.46 $69.37 (1%)
Base NAVPS C
.09 C
.07 31%
Fully-risked NAVPS C$1.09 C$1.10 (1%)
Q2/11E 2011E 2012E
Source: TD Securities
Valuation
At 0.22x Fully-risked NAVPS, Petrodorado trades at one of the lowest multiples in our coverage of
International E&Ps (54% discount to the group average).
Action Notes August 19, 2011
Equity Research 7 of 17
Exhibit 2. Petrodorado: Relative Valuation
Recent At Price At Price At Price
Price Current Target Current Target Current Target
Ticker 17-Aug-11 Estimate Multiple Multiple Estimate Multiple Multiple Multiple Multiple
BNK C$4.56 C$13.04 0.35x 0.92x C$7.74 0.59x 1.55x 4.0x 11.4x
BKX C$2.59 C$7.80 0.33x 0.90x C$1.97 1.32x 3.56x 11.7x nmf
CNE C
.92 C$1.61 0.57x 0.93x C
.28 3.25x 5.30x 5.8x 9.6x
CZE C$8.65 C$16.23 0.53x 0.92x C$5.88 1.47x 2.55x 0.9x 3.8x
GTE C$5.84 C$9.78 0.60x 0.97x C$4.60 1.27x 2.06x 3.2x 6.0x
NKO C$58.32 C$134.48 0.43x 0.78x C$21.35 2.73x 4.92x 15.6x nmf
PRE C$25.68 C$39.13 0.66x 0.95x C$19.64 1.31x 1.88x 3.8x 5.9x
PXT C$6.74 C$9.89 0.68x 0.91x C$2.41 2.80x 3.74x 2.7x 3.9x
PMG C$28.25 C$44.79 0.63x 1.00x C$15.62 1.81x 2.88x 2.8x 4.8x
PEC C
.61 C$3.75 0.16x 0.45x C
.00 nmf nmf 18.7x nmf
TNP C$1.13 C$3.52 0.32x 0.85x C$1.43 0.79x 2.10x 5.6x 13.2x
Average 0.48x 0.87x 1.73x 3.06x 6.8x 7.3x
PDQ C
.24 C$1.09 0.22x 0.83x C
.09 2.80x nmf 8.3x 24.8x
* Fiscal 2013 used as equivalent to calendar 2012 for CNE, NKO and PEC
Fully-risked NAVPS Base NAVPS 2012E EV/DACF*
Source: TD Securities
Justification of Target Price
Our unchanged target price of C
.90 for Petrodorado is based on a combination of Base and Fully-risked
NAVPS. The combination of 1.0x Base NAVPS and 0.8x Upside to Base NAVPS is lower than the average
and median multiples used for our coverage of International E&Ps. We currently use a range of 0.45-1.00x in
terms of our multiples of Upside to Base NAVPS.
Given current weakness in equity markets for speculative exploration companies in particular, we see
downward pressure on our upside multiples for speculative stocks in general. However, to stay consistent with
valuation methodologies for other speculative companies, we are not adjusting our target at this point.
Key Risks to Target Price
Key risks associated with our target price include business risks of the company and industry, including but not
limited to: loss of key employees, drilling success, volatile commodity prices, operating costs, capital cost
overruns, product supply and demand, financing/access to capital, government regulations, legislation,
royalties, taxes, exchange rates, interest rates, and environmental and weather concerns.
Key risks specific to Petrodorado are:
• Exploration risk is relatively high. Our NAVPS is almost entirely based on working capital and
exploration prospects, as the company has minimal booked reserves.
• A relatively low proportion of the company’s assets being operated implies significant control risk. When
added to the very limited near-term cash flow expectations, this contributes to considerable financial risk.
• Higher-than-average geo-political risk.
• Environmental and social objections to development of possible discoveries could be particularly relevant
in Peru and Paraguay.
Action Notes August 19, 2011
Equity Research 8 of 17
Investment Conclusion
We view Petrodorado’s farm-out in the Talora Block in Colombia as slightly positive, as it reduces near-term
financing risk and increases the likelihood of near-term drilling on the block (which could provide a material
catalyst for the stock, if successful). We see these factors as more important than a slight reduction in our
risked valuation caused by a reduced working interest in the block. In addition to drilling at Talora, we expect
the company to start drilling on the CPO-5 block in Colombia in late-Q3/11 or early-Q4/11. A resource report
for the CPO-5 block could help to quantify upside potential over the coming weeks.
Petrodorado currently trades at one of the lowest multiples to Fully-risked NAVPS in our coverage of
International E&Ps, and with a 275% return to our unchanged C
.90 target; we maintain our SPECULATIVE
BUY recommendation.