RBC REMARKS Lower NAV: Bankers today announced that its 1P reserves have increased by
42% to 147mmbbl; however, 2P reserves had increased by just 12% to
238mmbbl, and the corresponding future development costs had leapt to
$8.50/bbl, from $5.80/bbl. Management also indicated that the pace of
development activity would slow. In our $102/bbl (Brent, long-term real)
valuation, the 12% increase in 2P reserves is more than offset by the cost hike -
our revised Bankers PV10% is C$8.80/share (561p/share), down from
C$9.65/share (615p).
Value: At C$5.15/share (intraday price) the stock is trading below our revised
“core value” of C$5.54/share (353p) and on a 2012E cash flow multiple of 5.6x -
the valuation is not challenging. However, with few catalysts and production
growth tail-end loaded, due to some water-handling constraints, the stock appears
to lack momentum.
Investment case: Management’s “End Game” is to grow the business and sell it
at a premium; however, we believe increasingly that an industry buyer – such as a
European refiner/trader looking to add long-life reserves - could be attracted to
the strategic heavy-oil asset by the drifting share price. We note that Shell is
establishing a foothold in Albania via a JV with Petromanas. In our opinion, a
company with a lower WACC could pay C$7/share for the 2P reserves, and a
robust defence or a buyer with a more bullish outlook for the oil price could
result in a price nearer our NAV. Therefore, at current levels we would
accumulate the stock on any weakness.