From RBC
https://www.rbcinsight.com/WM/ResearchViewer/1924-345257-1?docType=PDF
November 11, 2014
Legacy Oil and Gas Inc.
Q3/14 - Water under the bridge
Our view: Legacy Oil+Gas' Q3/14 results featured broadly in-line
production levels but a surprise CFPS miss with annualized D/CF creeping
above 2.0x. To us, the weak quarter is water under the bridge, and we
expect the shares to recover ground as the company moves to a cash flow
neutral budget in 2015.
Key points:
• CFPS 12% below consensus. Q3/14 volumes averaged 25,004 boe/d
(88% liquids), compared to our 25,500 boe/d (89% liquids) estimate,
while CFPS of $0.48 fell 12% short of our target on 4% lower realized
prices, 3% higher than expected cash operating costs, and 3% higher
weighted average share count on the exercise of 2.9 million warrants.
We have nudged up our full year 2014 capex to $400 million to reflect
increased Q4 SE SK land acquisition activity, and project the company
to reduce its current $880 million indebtedness by $33 million with Q4
spending limited to 60% of cash flow.
• Deleveraging goals slowed by lower oil price, asset sales key to
acceleration. Although lower oil prices have delayed Legacy in reaching
its 1.5x D/CF objective, management confirmed that all options to
accelerate debt reduction remain on the table. Our current estimates
include $50 million in Q4/14 disposition proceeds for the company's
Elmworth Dunvegan assets (1,000 boe/d, 2/3 liquids, 17,000 net acres)
by year end, which would reduce Legacy's exit 2014 a net-debt-toforward-
cash-flow ratio to 1.9x, compared our 2015 oil-weighted peer
average of 1.6x. Legacy's liquidity position is adequate with roughly
$280 million in projected bank line capacity heading into 2015 with 3
years until the maturity of its US$200 million term debt issue.
• We project 8 to 12% per share growth within cash flow through
2016. On its Q3 conference call, management indicated that its 2015
capital budget is not set, but that its earlier $450 million steer included
15-20% for discretionary items such as land, facilities, and seismic.
Further, management remains committed to continued expansion of
water flood projects and the key in our minds is balancing operational
momentum with cost saving measures. Based on a 32% decline rate and
low $40,000's capital efficiency, we estimate Legacy can grow between
8% to 12% annually on a debt-adjusted per share basis through 2016
at WTI oil prices in the mid-$80's, ahead of an average of 7% for its oilweighted
peers.
• Discounted valuation remains compelling. At current levels, Legacy is
trading at a 2015E EV/DACF multiple of 3.6x (vs. oil-weighted peers at
5.8x) and a P/NAV of 0.6x (vs. peers at 0.9x). At current levels,the stock
provide free exposure to 125+ million boe of unbooked resource.
• Reiterating Outperform rating with a $9.00 price target. Our 12-month
price target is driven by our expectation of sustainable 5-10% per share
production and cash flow growth with a stable financial outlook.