Jennings Capital Can't remember if I posted this before but here was Jennings report from 1 Oct 12. GLTA
PALLISER OIL & GAS CORPORATION (TSXV-PXL C$0.65)
RECOMMENDATION: BUY 12-MONTH TARGET: C$1.15 RISK RATING: ABOVE AVERAGE
TREMENDOUS UPSIDE WITH APPLICATION OF HIGH VOLUME LIFT
? Pure-play heavy oil (11 – 15º API) with focus in greater Lloydminster area
? Substantial upside with application of High Volume Lift (HVL); potential to add $0.42/sh risked ($1.04/sh unrisked) to net asset value as unbooked locations are proved up
? Significant reduction of operating costs from ~$34/Boe in Q3/11 to $22/Boe in Q2/12, while increasing production from 1,418 Boe/d in Q3/11 to 2,300 Boe/d in August 2012 and 2,400 Boe/d in September 2012
? Drilling inventory has multi-zone potential with minimal exploration risk
? Experienced management and technical team specifically selected to exploit heavy oil with application of HVL
? Attractive entry-point – trades at ~30,000 EV/Boe/d its current production.
HIGHLIGHTS
Palliser has amassed an impressive heavy oil drilling inventory of over 160 locations. The core assets are located in the heavy oil-prone greater Lloydminster area comprising undeveloped land of 29,000 net acres. Current production is ~2,400 Boe/d and management has guided to exit 2012 at 2,600 – 2,800 Boe/d. The Company’s stock performance has suffered in the last 12-months, not only due to lack of market appetite for junior oil and gas exploration and production companies, but also due to its higher than average operating costs. However, Q2/12 operating costs were ~$22/Boe, a significant reduction from a high in Q3/11, which averaged ~$34/Boe, and we feel the Company is now in a position to maintain or even improve those operating costs going forward by continually adding to its saltwater disposal capacity as needed. Focus for the remainder of the year includes a heavy drilling program (six oil wells and two salt-water disposal wells were drilled in the first half of the year out of the 26 budgeted) and further application of HVL.
VALUATION
Palliser currently trades at 4.4x and 2.8x its 2012F and 2013F EV/DACF (DACM multiple), respectively. On a cash flow basis, the Company is trading at 2.2x and 1.4x its 2012F and 2013F P/CF, respectively Historically, Palliser has traded between 1.0x and 3.5x its one-year forward P/CF multiple (See Exhibit 2, page 5).
On a net asset value basis, Palliser trades at 1.2x its 2P net asset value and 0.6x its exploration risked net asset value. Comparatively, the heavy oil group trades at 0.9x its 2P NAV. Although the Company trades above its 2P NAV, we anticipate good reserves additions this year with further validation of its HVL application.
RECOMMENDATION
We are initiating coverage on Palliser Oil & Gas Corporation with a BUY recommendation, Above-Average risk rating and 12-month target price of C$1.15/share. The target price is based on an equal weighting of 2013 debt-adjusted cash flow, utilizing a 4.0x multiple, and risked exploration NAV, utilizing a 1.0x multiple.
CATALYSTS
? Validation of HVL through increased 2012 reserves assessment
? Heavily weighted 2H/12 drilling program
? Expansion of land base through strategic acquisitions
? Continued improvement to operating costs targeting ~$20/Boe by year-end