from RBC Capital Markets Analyst day highlights
Our view: Surge Energy's inaugural analyst day covered a lot of ground that gave a clearer picture of the growth vs. FCF components of its diverse asset suite. What stood out to us was the company's conviction in limiting capital reinvestment to 50% of cash flow, but an open mind to trimming its portfolio in the future.
Key points:
Diverse portfolio features three growth drivers. In the context of its 3–5% per share growth target, Surge's key growth pillars include the Upper and Lower Shaunavon (300+ future drilling locations), the recently discovered Eye Hill and Provost Sparky Pools (80+ locations), and the Midale (27 locations excluding Longview).
Budget to be reset after June 3 Longview vote.
Surge remained silent on specific plans in connection with the Longview assets but indicated
that the current $120 million capital budget is likely to be adjusted following the Longview shareholder vote in early June. In our view, the Upper Shaunavon and Midale rank as the most attractive candidates for incremental dollars based on well economics and relative capital efficiency metrics.
Open mind to trimming portfolio.
Although not a current priority, management showed an open mind to future non-core assets sales, although no targets or time-line have been set. Notably, Surge has farmed out about 85% of its Viking rights and 90 sections of exploratory acreage adjacent to its Bakken/Three Forks pool at Manson. Given the financial framework, utilizing farm-outs to minimize exploration exposure makes sense to us.
Valuation is in line with peers.
Surge trades at a 2014E EV/DACF multiple of 6.0x (vs. yield paying peers at 5.9x) and a P/NAV of 1.0x (vs. peers at 1.0x) at RBC's price deck.
We maintain our Sector Perform rating and $7.00 per share 12-month price target. Our price target is driven by our expectation of Surge achieving its 2014 guidance, a stable financial outlook, as it builds scale and generates FCF for visible organic growth.