RE:Raymond James SOG commentary from today Cash in the Coffers; Next Step Unlock Muskeg Value
Event
We are updating our assumptions following the completion of the company’s
$48 mln equity financing.
Recommendation
We continue to believe the Muskeg formation holds the most near-term
potential for value creation for Strategic. The additional cash in the coffers
allows a Muskeg focused program for 2014 and production/reserves growth.
We are maintaining our Outperform rating and $1.40 target.
Analysis
The incremental capital is expected to facilitate an acceleration of drilling at
Steen River. We have added 2 Muskeg wells to the 2013 program (coming on
production in 2014) and 9 horizontal Muskeg wells to the 1H14 drilling
program. In all, we expect the company to spend an additional $40-45 mln
during 4Q13 (~$13 mln) and 1H14 (~$32 mln) - ~$30 mln more than our
previous estimate. The wells will come on production throughout 2014 and we
are increasing our 2014 production estimate from ~5,400 boe/d to ~6,100
boe/d accordingly. As a result of these changes, our cash flow estimate
increases, but our cash flow per share estimate remains unchanged. We now
forecast a 2014 exit production rate north of ~7,000 boe/d.
By year-end 2014 we expect the significant amount of delineation across the
Muskeg to prove the viability of the play. This should build significant comfort
in the production profile of these wells and provide enough data points to build
a reliable type-curve. This will significantly de-risk the play’s potential, which
should begin to be reflected in the company’s stock price – we estimate that
the current stock price implies a free option on this play.
From a reserves perspective, although we expect 2013 to benefit somewhat, a
large proportion of potential bookings will likely come in the 2014 report. This
will likely translate into a more robust bank line increase in early 2015 to fund
future years’ drilling programs and allow the company to become less reliant
on equity financing.
Valuation
Our $1.40 target price applies a 50% weighting to both our 2013E NAV estimate
(Exhibit 1) of $1.59 and a 4.0x multiple (based on the company’s 2-year
historical trading range) on our 2014E $0.27 cash flow per share estimate.