Haywood Securities Update
Impact – Negative: Despite downward adjustments remains the same that Arcan has a large contiguous land base in a repeatable light oil play that can be exploited with horizontal drilling and multi-stage fracturing. we believe the assets lend themselves to exploitation by an entity with a larger balance sheet and thus Arcan is a likely takeout candidate during 2012.
Forecasts – Our 2012 average production cash flow is down 15% to $100MM ($1.00 production as 9,163 boe/d and cash flow as $147MM ($1.48 share).
Target Price, Ratings – We are maintaining our investment recommendation of Sector Outperform but are reducing our 12 month target price of $8.25/share
Issues:
Production is down due to logistics, not poor well performance important distinction as the inherent value believe the performance of wells (notwithstanding the downtime) continues to meet expectations.
Two rigs currently running in Swan Hills as the Company heads into break-up. Management has indicated that it will likely keep the two rigs drilling through break-up on pads with good access. A reduction in activity will hopefully smooth out some of the downtime issues.
New wells are being frac’d every 5-7 days. Arcan has been able to secure more acid in early 2012 than in H2/11 and thus has been able to catch up on its inventory of drilled wells which have not yet been completed (now 5 wells instead of 8).
Valuation: Our target price of $8.25 is a 74% premium to the based on a 2013 EV/DACF multiple of 7.0x. We also believe this target price is closer to a potential sale value of Arcan in the context of today's markets.
Catalysts: New Beaverhill Lake wells coming onstream , increasing waterflood VRR.