TD --Right to an opinion Although I do not agree with it all, I respect the right of the TD analyst to make his recommendation. He maintained the “Reduce” and “Speculative” ratings, but increased the 12 month target from $0.15 to $0.20. Obviously, if you believe that target, you should sell immediately. If you do not, please respect his right to an opinion even though you think it is misguided.
The TD analyst explains that although the financing lowers risk, plenty of risk still remains: (1) risk that new ICDs will not perform as well as 2P1. (2) risk of future dilution if the company chooses to repay $172 million convertible debentures in 2016 with equity, (3) risk that Senlac continues to underperform.
With all due respect, these are definite risks. The question is how much weight does one put on them? At present, the market does not seem to evaluate them in the same way as TD. I must say, however, that TD reveals a flaw in thinking when they say they do not think the debt financing is enough to fund the six new Pad 2 infill wells for McKay. STP has talked about the need for such infill drilling to get the bbl/d up to capacity (Dec 12 news release). However, I am sure that expensive remedy will only be taken if ICDs do not turn out to be successful. Remember, ICDs were one of STP’s acceleration techniques. If acceleration to capacity is possible with ICDs, infill drilling will be unnecessary.
Now that the immediate financial crunch is solved, our attention should turn towards performance: (1) can Senlac be revitalized, (2) can >700 bbl/d be achieved on each pair at McKay, (3) can expenses be kept in control, (4) will ICD expenses be paid back quickly, (5) will cash flow turn positive. I think TD is looking at this wider picture and saying they want more proof before making a stronger recommendation for our investors. I think most of us would agree on their “Speculative” rating for STP.
Although I think TD is too pessimistic, their scenarios could occur. How many of us thought a year ago that a strategic review would be necessary!