Longview Oil Corp LGVWF

From RBC

[Al42]

March 28, 2014
Longview Oil Corp.
Weak Q4/13 results; 2013 recycle ratio indicates
continued value erosion
Our view: Quarterly results were weaker than expected and lower yr/yr.
High 2013 F&D costs resulted in a weak recycle ratio of 0.96x, indicating
another year of value erosion. We believe investors should remain focused
on the key issues facing Longview, particularly the undeclared intentions
of the Board of Directors to either replace the CEO or engage with Surge
Energy regarding a possible corporate sale.
Key points:
Recommendation unchanged. We maintain our Sector Perform
recommendation. We view the company's mature and low-decline
production base positively but highlight a scattered asset base and a
flat production and cash flow profile. The company's growth profile has
been comparatively weak to its peers in order to maintain its dividend
and balance sheet. The stock remains interesting as a possible takeover
candidate given the large position held by Surge Energy.
Q4 results below expectation. The company reported Q4 results that
were below our expectations. Production of 5,816 boe/d was ~8% lower
than our estimate of 6,332 boe/d. Volumes were down 1% sequentially
and down 2% yr/yr. FFO was reported at $0.29/share, which is in-line with
our estimate of $0.30/share. In spite of higher price realizations yr/yr, the
decrease to FFO is due to lower production volumes (see exhibits 2 & 4).
Weak recycle ratio indicates value erosion. 2013 F&D costs (incl. FDC)
increased 28% yr/yr to $37.32/boe. Operating netbacks of $35.69/boe
(excluding hedging impact of -$3.13/boe) were up 22% yr/yr due to
stronger price realizations. As a result, Longview's recycle ratio remained
weak at 0.96x for the year, similar to the 2012 recycle ratio of 1.0x. We
look for a recycle ratio of >1.5x as an indicator of economic value creation.
Looking for clarity on overriding issues. We identify two key issues. First,
we believe the actions of Surge Energy will have the most significant
impact on the Longview share price. Recent trading levels of Longview
suggest some expectation for a takeout bid, with upside to the current
share price remaining upon a bid and also tangible downside potential
exists should an offer not occur. Second, as a going concern, we await
details on the necessary CEO search, which could influence corporate
strategy and underlying performance.
Price target unchanged. We maintain the price target at $6.00, based on
a 0.60x multiple of Base NAV. This is below the oil weighted peer group
average of 1.0x. We use a lower than average NAV multiple to reflect the
company's lower than average growth rate.
Priced