VIRGINIA HILLS OIL CORP VFGGF

RE:production forecast by dundee capital

[eagle35]

 

Oct-12Apr-13Oct-13Apr-1400.511.52020Pinecrest Energy Inc. (PRY-CA)Volume (Millions)Price (CAD)VolumePinecrest Energy

Q2 production beats on remediation efforts, though cash flow was weaker

Pinecrest reported Q2/14 production of 2,070 BOE/d and CFPS, f.d. of $0.03 relative to our forecast 1,832 BOE/d and $0.03 and latest FactSet consensus of 1,993 BOE/d and $0.04. Absolute cash flow in the quarter of $5.95 million was below our $6.85 million due primarily to higher royalties, G&A costs and lower realized oil prices. We had mentioned the likelihood of a production beat in our prior note but had not adjusted production in light of the company’s history enduring poor field conditions during break-up.

Bank review starts the countdown

No new wells were drilled in the quarter with capital spending limited to remediation efforts and excess cash flow applied to outstanding debt, which stood at $114.8 million at quarter-end and is expected to close Q3/14 at $112 million (prior to hedge losses/gains). The company’s lenders have pushed their annual redetermination review to September 29, 2014 and limited borrowings under the existing facility to $115.0 million. Should the revolving period not be extended at this date then the company’s undrawn portion will be cancelled and the amounts outstanding will convert to a 364-day non revolving facility to be repaid on July 31, 2015.

At no time through our forecast horizon do we have the company's net debt position increasing, as minimal capital and a flat production profile provide free cash flow and a reduction in debt to $90.1 million by '15YE, essentially giving them 11 months to find a buyer, absent a change in the forthcoming redetermination. Ultimately even the July 31, 2015 deadline is not a conclusively hard stop, as we believe the company's lenders would be open to further negotiation rather than owning technically complex production.

Evi #2 and Evi #3 production sustained

Two of the company’s existing waterfloods responded well to earlier remediation efforts and continue to produce at rates consistent with pre-water breakthrough rates, leaving management cautiously optimistic that future activity can see improved capital efficiencies. The company’s seven waterfloods continue to have voidage maintained and will see remedial action as required (which we expect to be the extent of forecast capital spending beyond maintenance).

PDP reserve and tax pool value still comprising our target price

We are reiterating our $0.28 target price, which remains based on PDP reserve value (ATAX 10%) and tax pools. We remain Neutral rated given the higher risk associated with executing on a sale or farm-out.

 

 

PRY: Price/Volume Chart

Source: FactSet

 

 

 

Company Description

Pinecrest Energy is a pure-play in the Slave Point Carbonates of northern Alberta at Red Earth and Evi. The company has a 97% light oil weighting.