RE: RE: Dejardin came out with a 'buy' on equ Initiating coverage with a Buy rating and C$5.25/share target
Desjardins Capital Markets, March 27, 2012
- Value story—Equal currently trades at an estimated 2013 EV/boe/d of C$32,600 and EV/DACF of 3.8x
- More focused asset base following multiple M&A transactions in 2011, with exposure to three light oil
plays—Cardium at Lochend, Viking at Alliance and the Mississippian in Oklahoma
- Largest producing property is the Hunton liquids-rich play (85% of corporate production) in Oklahoma, which we believe is breakeven (NPV 10% AT) at US$2.50/mcf and US$105/bbl
- Previously over-levered balance sheet has improved, with potential for a dividend if debt is reduced further
- Estimated unbooked risked recoverable reserves of 13.5mmboe (valued at C$89.1m or C$2.41/share AT, NPV 10) compared with pro forma 2011 2P reserves (with the 1Q12 asset sale) of 37.5mmboe (base NAV of C$7.30/share AT, NPV 10)
Event. We are initiating coverage of Equal Energy Ltd. with a Buy–Above-average Risk recommendation and 12-month target price of C$5.25/share. The target price gives a 0.6x weighting to our risked resource-build NAV and implies an
estimated 2013 EV/DACF multiple of about 4.4x. Valuation. Equal trades at an estimated 2013 EV/boe/d of C$32,600, an estimated 2013 EV/DACF multiple of 3.8x and a P/NAV (after-tax) multiple of 0.5x, compared with our small cap group average of C$61,700, 4.2x and 1.2x, respectively.
We note that the Desjardins small cap coverage universe has a definite bias toward light oil–weighted producers, and we would expect most natural gas–weighted producers to trade at lower multiples on average.
Recommendation. While Equal continues to trade at a discount to its peer group, we believe there is inherent value to this story as the company continues to strengthen its balance sheet and streamline its asset base. Equal has demonstrated good success with its Cardium and Viking assets over the past two years and offers exposure to the emerging Mississippian play in Oklahoma, where the likes of Chesapeake Energy and SandRidge Energy are very active.The company’s largest producing property is the Hunton liquids-rich play in Oklahoma, which we believe is breakeven at current commodity prices owing to its high liquids content and offers free upside with a recovery in natural gas prices.
We also believe Equal has the opportunity to become a dividend-paying junior oil & gas company such as Parallel Energy Trust and Eagle Energy Trust, both of which currently trade at premium multiples to Equal. While Equal would
have to further reduce current debt levels in order to initiate a dividend, we believe that its valuation gap would start to close should it pursue this option.
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Desjardins seems to endorse our plan to convert to a trust such as Parallel or Eagle Energy Trust.
Regards,
Nawar