RBCJust like CIBC, they also maintain their Outperform rating and $9.00 target. GLTA
November 12, 2013
Legacy Oil and Gas Inc.
Q3/13 – Left on the Table
Our view: Although Legacy's Q3/13 results were marked by in-line
production, it likely left a CFPS beat on the table by virtue of higher costs
due to flooding and unscheduled maintenance work at its Turner Valley
field. Despite the setbacks, we remain positive on Legacy shares given
its light-oil focus, improving cost structure, and self-funded 2014 growth
outlook as it reigns in Q4 capital.
Key points:
• Left on the table. Legacy's production of 19,489 boe/d broadly matched
our estimate, albeit with 3% higher margin liquids volumes. However,
CFPS fell 5% below the mark due to 450 boe/d of lost production
at Turner Valley which also flowed through to 5% sequentially higher
operating costs per boe and a low $1.70/mcf realized gas price. Legacy's
realized hedging loss of $4.75/boe was in-line with our estimate, as
shown in Exhibit 3.
• Oil price leverage. Based on our 2014 Edmonton Par price of $94.96/
bbl, Legacy's hedging losses should fall to $0.81/bbl in 2014 from its
current hedge book which equates to about 30% of forecast oil volumes
at C$97 WTI.
• Reigning in Q4 capex. Legacy confirmed current field production
exceeds its 21,500 boe/d exit rate, which should firm up delivery of
its full-year 19,000 boe/d guidance. Legacy's pledge that Q4/13 capex
spending will be limited to two-thirds of cash flow is an important target
to watch, in our view, and should result in $33 million in debt repayment.
• Revised financial outlook. We project Legacy to have $240 million in
undrawn credit capacity on its recently increased $660 million bank line
heading into 2014. Assuming a balanced $345 million cash flow budget
and 11% production growth in 2014, we peg Legacy's 2014 trailing netdebt-
to-cash-flow ratio at 1.9x.
• Discounted cash flow valuation. At current levels, Legacy is trading at a
2013E EV/DACF multiple of 4.6x (vs. oil-weighted peers at 7.4x) and a P/
NAV of 0.9x (vs. peers at 0.9x) at RBC's price deck.
• Recommendation. We maintain our Outperform rating and 12-month
price target of $9.00 per share. Our 12-month price target is by driven
our expectation of sustainable per share production and cash flow
growth in Legacy's 10–15% target range with a stable financial outlook.