RE:target
From RBC.
https://www.rbcinsight.com/WM/ResearchViewer/1924-344210-1?docType=PDF
November 6, 2014
Long Run Exploration Ltd.
Q3/14 - Lowers guidance on facility outages
Our view: Long Run Exploration's in-line Q3/14 results were
overshadowed by third-party facility disruptions in its Deep Basin assets.
While we view the operational outages as temporary, we've reduce our
price target on Long Run shares from $5.00 to $4.00 as the market adjusts
to lower near-term volumes, higher spending and tightening liquidity.
Key points:
• Third-party facility disruptions weigh on volumes. Q3/14 production
of 34,795 boe/d (46% liquids) and CFPS of $0.45 were in-line with
RBC estimates, as shown in exhibit 3. Gas volumes came in 2% higher
than our expectations while liquids volumes came in about 800 bbl/
d short. Cash royalties, opex and transportation costs were $3/boe
lower than our assumptions offsetting lower realized prices and a
larger than expected hedging loss. Long Run estimates that a series of
planned and unplanned facility outages at Kakwa, Wapiti and Pine Creek
resulted in the loss of 1,600 boe/d of quarterly volumes. The outages
at Kakwa and Wapiti plus an unscheduled pipeline repair at Cherhill
are expected to lower Q4 volumes by 1,300 boe/d. A facility expansion
project is underway at Kakwa to reduce Long Run's reliance on thirdparty
infrastructure, but carries an early 2015 completion date.
• Lowering Q4 production guidance with higher capex. Long Run has
lowered its 2014 production outlook from 32,100 boe/d to 31,400 boe/
d with Q4 now expected to average 37,400 boe/d, which compares
to our previous 39,150 boe/d estimate. Long Run also raised its 2014
capital budget by 14% to $285 million in connection with the accelerated
facility expansion projects, which it plans to offset via non-core asset
sales with $26.9 million in net A&D proceeds realized through Q3. On a
positive note, initial Cardium LRNG results look encouraging to us with
two wells averaging 470 boe/d each over the first two weeks and a stepout
well test extending the geological trend northward. Liquids rates
were not provided although the company notes the wells tracked 15%
above its internal type curve. A 2-well pad at Wapiti in Q4 provides an
upcoming catalyst for the shares.
• Liquidity: tightening. We estimate Long Run’s 2014 all-in payout
ratio at 116% with a net-debt-to-trailing- cash-flow ratio of 2.1x.
Liquidity appears tight without further asset sales as the company is
approximately 91% drawn on its $695 million bank line. Long Run plans
to issue 2015 guidance in mid-December.
• Discounted valuation reflects portfolio in transition. At current levels,
Long Run trades at a 2015E EV/DACF multiple of 3.0x (vs. balanced peers
at 7.1x) and a P/NAV of 0.6x (vs. peers at 1.0x) at RBC's price deck.
• Maintaining Sector Perform, Speculative Risk with revised $4.00 price
target. Our 12-month price target is driven by our expectation of Long
Run achieving its reduced 2014 operational guidance with a stable
financial look, as it extends its portfolio longevity.