td Southern Pacific Resource Corp.
(STP-T) C$1.40
Getting While the Getting's Good (corrected version)
Event
Since we are no longer under research restriction for Southern Pacific
Resource Corp. (STP-T), we are taking the opportunity to 1) recalibrate the
balance sheet and liquidity outlook given the recently announced and upsized
~$80.6 million bought-deal equity financing, and 2) to review its FY Q4/12
results (issued last week).
Although we have made several changes to our estimates, our BUY
recommendation and $2.25/share target price both remain unchanged.
The purpose of this note is two-fold:
1) To discuss the rationale behind the financing and more importantly,
the impact to its liquidity position.
STP-McKay Phase 1 steaming was
initiated in early July with first production slated for calendar Q4 (would
suggest first volumes as early as October but realistically November).
Although the cash flow contribution from this expansion should ultimately
prove significant, we suspect it may not be that meaningful until roughly mid-
2013.
With an arguably stretched balance sheet prior to the financing, STP correctly
(in our view) decided to take advantage of the available financing window.
Although one could argue that it may have bridged the ‘cash flow gap’
without the deal, this would have been unwise, in our view.
2) To review its FY Q4/12 financial results.
Heading into the quarter, the
two key areas of focus from our perspective were 1) the state of the balance
sheet (referenced in our July 4, 2012
Transfer of Coverage report), and 2)
STP-McKay Phase 1 ramp-up (a clear catalyst). With this in mind, FY Q4/12
proved to be a relatively quiet quarter with 1) STP-McKay Phase 1 still
tracking per expectations, 2) a miss on Senlac volumes, and 3) a 2.7%
increase to its 2P+2C reserves/resource estimate (relative to November 2011).
Impact
SLIGHTLY POSITIVE
Energy Producers - Seniors &
Unconventional
Recommendation: BUY
?
Unchanged
Risk: HIGH
12-Month Target Price: C$2.25
?
Unchanged
12-Month Total Return: 60.7%
Market Data (C$)
Current Price $1.40
52-Wk Range $0.87-$1.92
Mkt Cap (f.d.)($mm) $555.7
Mkt Cap (basic)($mm) $563.8
EV ($mm) $988.0
Dividend per Share $0.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 806751
Financial Data (C$)
Fiscal Y-E June
Shares O/S (f.d.)(mm) 396.9
Shares O/S (basic)(mm) 402.7
Float Shares (mm) --
Net Debt ($mm) $359.1
Net Debt/Tot Cap 45.6%
Estimates (C$)
Year
2010E 2011A 2012E 2013E
CFPS (f.d.) nmf 0.16 0.14 0.12
NAVPS (f.d.) -- 1.78 -- --
Oil (b/d) nmf 4,230 3,637 6,912
Gas (MMcf/d) nmf 0.0 0.0 0.0
MBOE/d nmf 4,267 3,646 6,912
CFPS (f.d.) Quarterly Estimates (C$)
Year
2010E 2011A 2012E 2013E
Q1 nmf 0.04 0.03 0.01
Q2 nmf 0.04 0.03 0.02
Q3 nmf 0.03 0.05 0.03
Q4 nmf 0.05 0.03 0.05
Valuations
Year
2010E 2011A 2012E 2013E
P/CFPS (f.d.) -- 8.8x 10.0x 11.7x
EV/DACF nmf 17.5x 19.2x 17.5x
P /NAV -- 78.4% -- --
Supplemental Data
Year
2010E 2011E 2012E 2013E
Oil (US$/bbl) 79.45 95.00 95.00 90.00
Gas(US$/mmbt) 4.35 4.00 2.60 3.50
FX (US$/C$) 0.97 0.97 1.00 1.00
All figures in C$, unless otherwise specified.
Menno Hulshof, CFA Tyler Irving (Associate)
Action Notes
October 2, 2012
Equity Research
26 of 74
Details
1) ‘Getting while the getting’s good’
STP’s upsized ~$80.6 million bought-deal financing is a clear positive and largely mitigates the balance sheet
risk, in our view. More specifically, STP now appears well positioned to bridge the cash flow gap through
STP-McKay Phase 1 production ramp-up, and beyond. Use of proceeds includes $30 million in working
capital for its rail initiative, $18 million for the Phase 1 overrun and another $18 million of discretionary
capital (Phase 1 expansion long-lead commitments/engineering in addition to winter drilling activity).
Why finance now?
Although STP could have arguably sustained itself for another 6-9 months, the reality with
respect to SAGD is that there is tremendous variability in the ramp-up profile from project to project. With this
in mind, the key considerations are two-fold: 1) there was a clear financing window with a bought deal tabled
(i.e. it was there for the taking), and 2) the uncertainty associated with the production and cash flow ramp-up
profile.
We strongly contend that it always makes more sense to capitalize on financing windows since they can close
just as quickly as they open. In addition, there is oil price and heavy differential risk. Clearly another
correction would impact its ability to tap the markets.
How much running room has it given STP?
In Exhibit 1 below, we summarize the pro-forma financial
outlook from a uses-of-funds and sources-of-funds perspective. Under the TD deck, we estimate that STP will
exit FY 2013 with excess liquidity of $102 million ($103 million under strip pricing). Our current estimates
suggest that STP is unlikely to have to go back to the market until the end of CY 2014. This reflects a CY 2013
and CY 2014 STP-McKay Phase 1 production contribution of 5.9 mbbls/d and 10.2 mbbls/d respectively; both
are highly conservative in our view.
Exhibit 1: Sources and Uses of Cash for the Coming Year
Sources - FY 2013 ($ millions)
TD Deck Strip
Net working capital ($7) ($7)
Equity financing proceeds $81 $81
Credit Line $30 $30
Cash Flow $46 $47
Total $157 $158
Uses - FY 2013 ($ millions)
Capex ($55) ($55)
Liquidity Surplus (Deficit) $102 $103
Source: Company Reports
Implications for its credit rating and the cost of debt?
STP will be going through a credit rating evaluation
later this year. In addition, we note that STP is still carrying its senior notes at ~10.5% with the potential for a
renegotiation of these terms towards year-end. Clearly having a stronger balance sheet could positively impact
the outcome of both initiatives.
2) FY Q4/12 results…several noteworthy considerations
STP-McKay Phase 1 ramp-up on track:
As was previously disclosed, steam circulation is advancing on all
12 of its initial well pairs. The steam plant has been running consistently, delivering steam to the wellbores at a
99% on-time load factor.
STP continues to guide to a 3-4 month steam soak which would suggest that first production could be achieved
as early as October (although November appears more realistic). Both the STP-McKay Phase 1 Expansion and
Phase 2 development timelines remain on track.
Action Notes
October 2, 2012
Equity Research
27 of 74
Senlac volumes surprise to downside:
FY Q4/12 volumes fells to 3,404 bbls/d, down 18% from FY Q3/12
levels of 4,154 bbls/d. Production continues to decline normally (current volumes of 3,100 bbls/d) due to
natural declines from new Phase J well pairs which were brought on-stream back in January 2012.
The bad news is that FY Q1/13 volumes are expected to fall even further given a three-month delay to Phase
K. STP now plans to drill the first Phase K well in mid-October with first production in February 2013 due to
recently introduced regulations in Saskatchewan. Our understanding is that STP continues to target Senlac
volumes of 4,000-4,500 bbls/d long-term (through the addition of one new pad per year).
June 2012 2P+2C reserves/resources up 2.7% over November 2011 levels:
Per Exhibit 2 below, there was
a modest increase in 2P+2C reserves/resources since the last report issued in November 2011. On a y/y basis,
its 2P+2C reserves/resources estimate increased 3.8% y/y and 2.7% relative to November 2011. The y/y
increase was largely driven by the filing of applications for the STP-McKay Phase 1 Expansion and Phase 2.
Exhibit 2: Updated Reserves and Resource Estimates
Reserves Data (MMbbls) Jun-11 Nov-11 Jun-12 %
Δ YOY %Δ Since Nov
Proved 1P 120.8 120.2 120.4 -0.3% 0.2%
Proved + Probable 2P 181.0 234.0 248.9 37.5% 6.4%
Contingent Resources 2C 665.5 621.8 630.0 -5.3% 1.3%
Total 2P + 2C 846.5 855.8 878.9 3.8% 2.7%
Source: Company Reports
Valuation
STP is currently trading at 78% of our NAV, which compares with the peer group average of 84%.
Justification of Target Price
Our fully-expanded risked NAV plus a 12-month projected growth rate generates a value of $1.93/share.
Applying a discretionary adjustment of 10% yields a 12-month target price of $2.25/share and a BUY
recommendation.