Reason for Drop - CIBC Downgrade?? Strategic Oil & Gas Ltd.
High Cost Structure and Play Risk Too Much to
Bear; Downgrading to SU
With this note we are downgrading Strategic to SU (from SP) as of January
13th given the risk levels associated with its high operating cost structure
and limited proof of concept in its Muskeg oil play, leaving too many
questions to justify the valuation in our view.
On 2014 futures pricing, we forecast Strategic to deliver a $38.37/Boe
operating netback, 13% below the oil group average. With the US rapidly
growing light oil volumes, a high cost producer in far remote NW Alberta is
in a very marginal position in the supply chain.
To compound this, there is very limited public data on the performance of
SOG’s key growth play. Given we forecast SOG trading at 5.0x 2014
EV/DACF (on strip), not far off the oil group at 6.3x, we would sell and wait
on confirmation of the Muskeg’s economics and avoid the risk.
SOG offers PPSG of 8% in 2014E versus the oil-group average of 25%,
while spending at a rate with leverage forecast to be 1.8x 2014 D/CF (on
strip) well above the oil group of 1.1x. We have lowered our Price Target
from $1.10 to $0.95, implying a return of 19%, below the oil-group at 25%.