upping price target to $7.4+ For a while I reduced my price estimate for Equal in consideration of lower NGL
prices and lack of clarity on the buyers for the US assets, under following
scenario, I project a share price of $7.4:
I believe the entry of ICON investments in the picture has radically changed the
outlook for a successful sale for the US assets, it is important to understand
the timing and implications of ICON actions. ICON first indicated its intention
to acquire Hunton assets on October 3rd 2012:
https://www.prweb.com/releases/2011/10/prweb8841470.htm
However despite them doing the filing in October of last year, ICON only
rendered the filing effective on July 10th 2012, and by rendering the filing
effective I mean they actually started the money raising process; a company can
file anything with the SEC at anytime, but they can't act on it until it is
declared effective by the SEC at the request of the filer. I find the fact that
ICON started to raise the $200m to $300m two months after Equal have initiated
its strategic review as very curious, I am virtually certain that ICON is one of
the bidders for our Hunton portfolio, an asset that fits perfectly well with
their fund objective.
I also know from a credible source that Atlas wanted to acquire the totality of
our Mississippian acreage, but Equal refused, thus we do have a natural buyer
for the Mississippian as well.
If we were to assume that ICON was to acquire our Hunton assets for $230m and
the reminder of the Mississippian was to be sold for at least $20m (probably
even more considering that several wells are being drilled), Equal would net at
least $250m from the US.
Proceeds of $250m would fully eliminate Equal debts and give us a $100m net cash
position. In addition we would be left with the Canadian assets presented by the
Cardium sweet spot, Viking at Halkirk and the Clair oil field.
Equal recent Lochend 9 days IP 890 bpd, and Pengrowth recent Q2 numbers
indicating two wells at Lochend at 800 IP30 further confirm that Equal has an
amazing opportunity in this area, with 2 Cardium wells coming online in Q3 we
could be looking at 2000+ barrels of mostly light oil production in Canada by
Q4::
Current production 1000 barrels
End of quarter: 900 barrels
New Cardium well - 800 barrels
1st month 800 barrels, 2nd month 700 barrels, 3rd month 600 barrels.
Quarterly contribution: 700 bpd
Second Cardium well - 700 barrels
1st Month 700 barrels, 2nd month 600 barrels, 3rd month 500 barrels.
Quarterly contribution: 600 bpd
900+700+600 = 2200 barrels
If we were to be more conservative and assume 2000 barrels per day, those
barrels would be worth $160m to $200m based on $80K to $100K per flowing barrel
value, this is a perfectly reasonable valuation when considering that Equal will
be net cash positive at $100m+, further more Equal would still have about 40
locations in the Cardium and 150 to 250 locations at the Viking, further more
EQU would be cash rich (unlike most of its peers) and maybe able to acquire
competitors trading at hefty discounts due to the general depressed valuation in
the Canadian junior space.
At a valuation of $160m (80K per flowing barrel) for the Canadian assets, and
$100m in cash, Equal total market value would be $260m or $7.42 per share, and
with scope for a much higher valuation if the Cardium was to be drilled to its
full extent, we could be looking at a double digits stock in under 1 year. The
Lochend sweet spot impact doesn't show when applied to a large production base
like Pengrowth's or PetroBakken's, but for the resulting small EQU after a US
divestiture the impact would be huge, we could be delivering more light oil
production growth than any other junior in Canada, very few fields offer 500 Bpd
to 800 Bpd in 30 days IP in western Canada and even less companies have $100m in
cash to drill the resource uninterrupted.
My initial preference was around the trust model, but the emergence of the
Cardium sweet spot renders the Canadian light oil growth model equally exciting.
Regards,
Nawar