Cormark target $0.80 Recommendation
With a strong partnership formed on PPL 259, EWD is positioned to
commence high impact drilling this year. We are reiterating our Buy (S)
recommendation and are increasing our target to
.80, from
.75 previously.
Details:
PPL 259 Farmouts:
• Eaglewood has executed farmout agreements with Ketu Petroleum Ltd, a wholly owned subsidiary of
Horizon Oil Ltd., and Mega Fortune International Ltd., currently a 10% equity participant in PPL 259
and PRL 28. Each farmout agreement is for a 25% WI in Eaglewood’s PPL 259 (in which it currently
holds a 90% WI). If both agreements are executed, Eaglewood will retain a 40% interest and
operatorship of PPL 259.
• In order to earn its respective 25% working interests, Horizon and Mega Fortune will each pay
Eaglewood US$2.68 MM in sunk costs, US$1.375 MM to cover EWD’s expenses for an upcoming
seismic program on PPL 259, US$5 MM to cover EWD’s expenses for an upcoming well on the
licence, plus its 25% share of the costs for seismic and drilling. The total estimated cost for each
farmee to earn a 25% interest in the licence is US$15.4 MM.
• Both transactions are conditional on the receipt of regulatory approvals and other customary
conditions.
• Of note, Horizon Oil is the operator of PRL 4, which contains the Stanley discovery and PRL 21,
which contains the Elevala and Ketu discoveries. Horizon is an experienced operator in Papua New
Guinea and an excellent partner to have involved with PPL 259. Part of the forthcoming seismic
program Eaglewood will be acquiring is intended to determine the extent to which the Stanley
discovery spills over onto PPL 259. Unitization discussions with Horizon are expected to take place in
H1/12 and could result in Eaglewood receiving a percentage of the resources in Stanley.
Financial Flexibility: As at September 30, 2011, Eaglewood had positive working capital (including
restricted cash amounts) of $4.2 MM. Subsequent to quarter-end, EWD announced the sale of a 20%
interest in PPL 260 to a subsidiary of Exxon for US$7.0 MM, while yesterday’s announced farmouts are
expected to bring in US$5.4 MM for prior sunk costs.
Valuation: Our target price for Eaglewood is based on a risked net present value (NPV) calculation of the
potential value of commercial discoveries in the Company’s exploration base. With the farmout of 50% in
PPL 259, our risked NPV stands at
.83 per share (up from
.78 previously) and is the basis for moving
our target price up to
.80, from
.75 previously.
Conclusion/Recommendation:
• With the proceeds from the previously announced working interest sale of PPL 260 to Exxon (US$7.0
MM) and the cash and carries provided by the farmouts on PPL 259, Eaglewood is positioned to
ramp up activity on PPL 259 in 2012. Eaglewood continues to hold a strategic asset in the Ubuntu
discovery on PRL 28, a 10% interest in PPL 260, and 100% interest in PPL 257. The Company
continues to wait for a licence extension on PPL 258, but is confident that it will end up with a
renewal.
• Given the resource potential of the Ubuntu discovery and the exploration upside offered by the PPL
259 licence, we are reiterating our Buy (S) recommendation on Eaglewood.