RBC on STP Update Southern Pacific Resource Corp. (TSX: STP; 0.49)
Rating:
Risk Qualifier:
Price Target: 0.75
Sector Perform
Speculative Risk
Under Pressure
We believe that the positive results of Southern Pacific's High Pressure Steam
Stimulation (HPSS) pilot test are outweighed by a low production rate in May and
heightened concerns over underlying reservoir fundamentals. While it addresses
one problem, further implementation of HPSS may hinder production rates
during the rollout over summer.
• At McKay, production averaged 1,024 bbls/d during the month of May, flat from
1,023 bbls/d in April and 32% below our estimate of 1,500 bbls/d.
• We take the decision to use HPSS (High Pressure Steam Stimulation) as the
initial operating techniques as a signal that the initial production response at
McKay has not met initial management expectations thereby possibly raising
questions about the underlying geology, and optimal development technique, of
the reservoir.
• We maintain our Sector Perform, Speculative Risk recommendation and our
$0.75 price target.