RE: Hoping For No Sale
From TD Waterhouse April 13 notes on RPL:
Capital efficiencies remain in line with our expectations.
RPL also cited spending $34mm in order to add roughly 990 BOE/d of production over the quarter, or $34,000/BOE/d. This compares favorably with company guidance ($40,000/BOE/d), but in line with our assumption of $35,000/BOE/d. Given that production was relatively flat from the beginning to the end of the quarter (prior to the previously announced asset sale), this implies that the 990 BOE/d went purely to replacing production declines during the quarter.
Strategic review to identify and execute on next steps.
In our view, and in light of the recent share price performance, RPL needs to demonstrate: 1) its ability to do more with less through better-than-forecast capital efficiencies/decline rates and 2) a roadmap to debt reduction. We have been of the view that the underlying assets have the capacity to support a free cash flow generating model, largely owing to the low decline nature and maturity of the acquired Queensdale assets. That said, we realize that a 2.7x-2.9x net debt/cash flow ratio is higher than our comfort zone, and a solution would likely result in a positive market response, in our view.
The two obvious alternatives to consider are asset sales and a revision (whether reduction or implementation of a DRIP) to the current dividend policy. At the current 16.7% yield level, the annual dividend commitment is $47mm, relative to our 2013 cash flow of $109mm and company guidance of $128mm. Cutting the dividend to 10% could ease cash outflows by $19mm (on an annual run rate), but this would not have a significant enough impact on improving the balance sheet position to make a difference, in our view. Implementation of a DRIP would have a similarly small impact, in our view.
As a result, we believe that an asset sale is most likely the best course of action, should one ultimately be chosen. The SE Saskatchewan assets are the crown jewels, in our mind, and are likely the last to go, which leaves the Dodsland Viking and Northern Alberta Slave Point on the table. We estimate production from these latter two regions currently averages roughly 1.9 mBOE/d (dominated by the Viking), and could be a source of $110mm-$190mm (assuming metrics of $60-100,000/BOE/d).