GMP - LRE cheapest of the cheap ($6.75T)
Below are a few pages from a report GMP put out last night. I couldn't figure out how to paste the tables into the message but the text summarizes their thoughts and valuations. Obviously in a down market everything is "cheap" but GMP thinks LRE is the cheapest of them all. They use long term WTI of $90 a barrel, which some argue is going to be at $80 soon. However, I think forecasts are still calling for WTI around $90 over the next 12 months.
Repositioned to deliver for the long run
Low-risk upside on developed oil plays
We believe 2013 is the year Long Run will prove to the market they can execute on their low-risk asset base while maintaining financial flexibility. Over 70% of the company’s 2013 capital budget is going to their Montney oil play in the Peace River Arch and their Redwater Viking play, resource plays we characterize as being in the manufacturing stage where the company is drilling low geologic risk infill locations while focusing on economic improvement through refined completion techniques and cost management.
Based on recent drilling results (Q4/12 onward), driven by improved completion techniques, we estimate capital efficiencies on Long Run’s Montney oil play have improved 40%, while their Viking Redwater wells have seen nearly a 25% improvement, with both oil plays paying out in less than one year based on the new economics. This focused, low-risk drilling program is driving a 2013 estimated liquids growth profile that exceeds 20%.
Mistakenly put in the bargain bin
Based on our 2013 estimates, Long Run currently trades at the lowest valuation of any of our Intermediate producers; in fact, the company is trading at an average discount of 60% when compared to the peer average. While Long Run’s valuation is likely suffering as a result of the perceived execution ability of predecessor companies, we believe Long Run is different. The company has significantly improved its balance sheet strength, focused its drilling program and is concentrating on meeting the market’s expectations. We see minimal downside at these trading levels; the company is trading a little over its 1P NAV value and is supported by a strong balance sheet and experienced management team targeting what we believe is conservative guidance.
Initiating coverage with BUY rating, $6.75 target price
We are initiating coverage of Long Run with a BUY rating as we believe the company offers deep value that is supported by low-risk oil upside and financial flexibility.
1) Low-risk upside—development drilling drives growth
To us, the main factors that contribute to low-risk upside include:
Development based drilling program
o The focus of Long Run’s 2013 capital program is to increase oil weighting through development drilling on their Redwater Viking and Peace River Arch Montney oil plays. This focus on infill drilling helps support our belief that Long Run will meet its guidance for 2013 as the company has de-risked the respective plays (from a geologic standpoint) and is now focusing on improving well economics through cost control and enhanced completion techniques.
Stronger reserve report
o We would argue that Long Run has a stronger reserve booking than both predecessor companies (Guide [previously Galleon] and Westfire). Both Guide’s and Westfire’s Proved Developed Producing reserves (PDP) made up roughly 30% of total 2P reserve weight. This has been increased to roughly 40% with Long Run’s most recent reserve update (average Intermediate PDP reserve weight is 35%). Another indication of increased reserve quality lies in the fact Long Run reduced the number of non-producing reserve bookings and in the end saw a $62 million and $46 million decrease in 1P and 2P future development capital (FDC) respectively.
Lack of infrastructure bottlenecks—control of destiny
o Outside of the significant land position acquired in the Galleon deal, Long Run gained an extensive 3D seismic library that will help exploration drilling through 2013 and, more importantly, the company acquired significant infrastructure. As displayed in Exhibit 1, as a result of the significant infrastructure builds previously completed, only 4% of Long Run’s 2013 capital is dedicated to infrastructure. Despite the focus on Redwater Viking and Peace River Arch Montney, Long Run has more than enough infrastructure in place to handle additional production growth..
2) Improving type curves—enhanced completion techniques delivering better rates
One positive trend that we feel is being underappreciated by the market is the fact that through completion technique refinements, both of Long Run’s main oil plays have seen an improvement in type curve performance. Despite the completion refinements, well costs have stayed relatively flat with the end result being a significant improvement in capital efficiencies and payout periods. It is worth noting our economics are not based on the recently improved well results which suggests there is room for the unbooked upside portion of our Risked NAV to go higher assuming we continue to see the improved results.
3) Valuation—mistakenly put in the bargain bin
We recognize telling investors they should buy a stock because it’s cheap in the current market doesn’t carry a lot of weight. But in the case of Long Run we do feel this is an argument worth presenting as we feel the valuation is unjustifiably discounted. Regardless
RISKED NAV DISCUSSION
Risked NAV of $8.72/share
• In their 2012 reserve report, Long Run took the opportunity to clean up booked reserves and reduced the number of booked non-producing locations at both Redwater and Kaybob. 2012 booked reserves totaled 83.2 mmboe (44% oil) with PDP reserves making up 40% of the total 2P bookings.
• Breakdown of booked reserves for Long Run’s three main areas (Peace area, Redwater and Boyer) is the following:
o Peace Area—15.9 mmboe of oil and NGL bookings along with 111.9 bcf of natural gas bookings combine to make 34.5 mmboe of 2P reserves or nearly 42% of 2P reserves
o Redwater—12.7 mmboe of oil and NGL bookings and 26 bcf of natural gas combine to make up 21% of 2P reserves
o Boyer—87.3 bcf of natural gas bookings make up nearly 18% of total bookings and over 30% of corporate natural gas bookings.
• Based on the 2012 reserve report (adjusted for the GMP price deck) we calculate a 2P NAV of $5.37/share.
• At this time, our upside analysis only utilizes unbooked locations on the company’s Montney oil play and Redwater Viking as this is where we see the majority of company capital going in the near term. Between these two plays, we see an unbooked inventory in excess of 400 net locations providing further upside of $3.31/share. It is worth noting we do not add value for unbooked locations until the company chews through their booked Future Development Capital (FDC). We also produce the unbooked locations under a capitally constrained scenario and discount the value back to today.
• The combination of our calculated Base (2P) NAV and risked upside make up our Risked NAV. Our current Risked NAV is pegged at $8.72 per share. Details can be found in the Exhibit below.