RBCTheir upside scenario target is $8.00. GLTA
November 20, 2015
Trilogy Energy Corp.
Attractively priced sale of Duvernay acreage
Our view: TET's sale of Duvernay acreage was done at favourable metrics,
trimming balance sheet leverage as well as reducing significant future
drilling commitments. The sale also marks a positive valuation point to a
play that has been recently light on news; we expect the stock to be well
received by the market tomorrow.
Key points:
• Solid Duvernay sale metrics. Trilogy sold a primarily non-operated
package of Duvernay land in the Northern volatile oil window
(Exhibit 2) for US$85 million (~C$113 million), which included 11 net
(9 undeveloped) sections of land and 580 boe/d (60% liquids) of
production. This maps to roughly C$13,500/acre, after adjusting for
a production value of ~$30,000/boe/d. Post sale the company is left
with about 73,000 acres of 'rich' Duvernay land, plus an additional
48,000 acres in the gassy southern region. Our current DCF-based risked
valuation carries TET's rich Duvernay acreage at ~$6,000/acre, reflective
of reservoir variability across the play. A simplified acreage valuation
table is also shown on Exhibit 4.
• Duvernay commitments reduced, expect capital reallocation to
shorter cycle time projects in 2016. TET's go-forward capital
commitments associated with the Duvernay are significantly reduced
(divested assets were non-op), allowing re-allocation to other projects.
Management expects to reduce 2015 spending to $85 million (down $15
million) with 2016 spend dropping by up to $75 million (our updated
estimate calls for $100 million capital spend in 2016, down from $125
million). Importantly, the company will be able to focus capital in 2016
on faster cycle time projects (i.e. Montney) as opposed to longer-dated
(and costlier) Duvernay developments.
• Tweaking estimates for Duvernay sale. Our CFPS estimates drop by
1% in 2015, while in 2016 our CFPS estimates increase 5% due to
reallocation of capital and improving efficiencies. Production volumes
in 2015 are now expected to be in the range of 28,000 boe/d and 2016
volumes now expected at ~24,000 boe/d (RBC estimate).
• Balance sheet improves - liquidity maintained. After the deal leverage
improves, with total year end net debt of $560 million mapping to 5.0x
D/CF vs peers at 4.1x. TET's credit facility was reduced to $450 million
(previously $538 million) on the back of a facility redetermination and
asset sale. Based on our updated estimates, the company's liquidity
remains relatively healthy and we expect the company to be ~60%
drawn on its facility by year-end 2015 (including working capital items).
• Sector Perform recommendation unchanged. TET offers significant
potential upside for investors bullish on the Duvernay. However, the
company's significant financial leverage and declining production profile
gives us pause. While we expect a significant positive reaction tomorrow
we've maintained our neutral stance, and have increased our price
target to $6 (previously $5) mainly driven by an updated valuation of
Duvernay lands.