C$1.50 target Lightstream Resources Ltd.
Justin Bouchard, P.Eng., CFA • (403) 532-6615 • justin.bouchard@vmd.desjardins.com
Jared Coulson, CFA, Associate • (403) 532-6625 • jared.coulson@vmd.desjardins.com
Timing is everything
The Desjardins Takeaway
Lower spending, lower production guidance, lower dividend and despite having sold C
$730m of assets in 2014, the company is in a very deep financial hole that we expect will
be extremely difficult to emerge from—unless we get back to much higher oil prices.
We are moving to a C$1.50 target and maintain our Hold–Speculative rating.
Highlights
Last night, Lightstream announced a revised 2015 capex budget, slashed its dividend
and indicated its intention to divest of its Bakken business unit in an effort to maintain
financial flexibility. The 2015 capex budget now stands at C$200m (midpoint) and
is expected to be funded from internally generated cash flow, but based on our
estimates, we believe LTS could fund that level of capex down to a US$70/bbl WTI
oil price environment. As a result of the significantly lower capex spend (we were
forecasting C$338m for 2015), production levels will be impacted materially, with 2015
production expected to average 31 mboe/d—a 23% reduction from 2014. In addition,
the company’s monthly dividend was reduced to C$0.015 from C$0.04. The cut was no
surprise, but frankly, we expected it would be even deeper.
The problem is that if Lightstream is successful at divesting of the Bakken unit at going
metrics of 5x cash flow and it uses the proceeds to pay down debt, we do not believe
the pro forma company improves as much as it needs to.
Valuation
We are lowering our target to C$1.50 (from C$3.75) based on an equal weighting of our
2014 NAVPS estimate and 2.0x our 2015 CFPS forecast. Our 2015 production forecast
has been lowered to 31.6 mboe/d (from 36.9 mboe/d) to reflect the updated guidance.
As a result, our 2015 CFPS forecast falls to C$1.17 from C$1.71.
Recommendation
In the current commodity price environment (and even if oil moves up 20% from here),
we believe LTS will be hard pressed to make any impactful changes. And, even if the
company is able to sell the Bakken, we do not see any real improvements unless the
company is able to hold out for significantly higher oil prices before transacting or
selling for above-market rates. Based on the revisions to capex and production, we have
lowered our target price to C$1.50 per share and reiterate our Hold–Speculative rating.