RBC Update NAL Energy Corporation (TSX: NAE)
Strong Q4; Weak 2011 Recycle Ratio
Sector Perform
Average Risk
Price: 7.26
Shares O/S (MM): 151.1
Dividend: 0.60
Price Target: 9.00
Implied All-In Return: 32%
Market Cap (MM): 1,097
Yield: 8.3%
Event
NAL reported better than expected Q4/11 results; however, 2011 reserve
replacement, F&D costs and recycle ratio were weak.
Strong Q4/11; No Change to 2012 Outlook
• Q4/11 and 2012 Outlook Summary - The company reported stronger
operational performance than expected relative to our expectations and
consensus. Production and cash flow was driven by strong light oil production,
particularly at Lochend. Volumes were high as a result of flush production
from new wells, resulting in having no impact on the 2012 outlook.
• Production - NAL reported Q4 production of 29,795 boe/d, ~3% higher than
our estimate of 28,821 boe/d and consensus expectations of 28,925 boe/d. The
beat came from light oil.
• Funds Flow from Operations - Q4 Funds Flow of
.44/share was higher
than our estimate of
.38 and consensus of
.42.
Flat Reserves; 1.0x Recycle Ratio
• Flat 2P Reserves - NAL replaced 127% of 2011 production with the drill bit,
but sold assets resulting in a 1% drop to 2P reserves year-over-year.
• Standing Still with a 1.0x Recycle Ratio - The company had a 2011 2P
FD&A cost of $29.23/boe including changes in future development capital
against a 2011 operational netback of $29.90/boe for a 2011 recycle ratio of
only 1.0x . We recognize that 2011 results were negatively impacted by higher
land, facility, retention and proof-of-concept drilling costs and we would expect
FD&A costs to improve back to historic levels.
Strong Financial Liquidity
• Bank Line Review - The company's three-year term credit facility will be up
for its first review this April. There could be some downward pressure to
borrowing capacity due to lower 1P reserves and lower natural gas prices
year-over-year. On a pro-forma basis, the company is <50% drawn on its $550
mm credit line. We are not concerned with liquidity at this time.
• On a pro-forma basis, we forecast a 2012 exit debt to 2013E CF ratio of 1.8x.
Investment Opinion
• No Change - We maintain a Sector Perform, Average Risk recommendation
and a $9.00/share target price based on a 1.3x multiple of our Base NAV,
which is below the peer group average target multiple of 1.8x.
• Liquidity and Yield - We see ample financial liquidity and a strong and
sustainable dividend yield of 8.3% based on the current stock price.