March 14, 2017
250% reserves replacement but no Mitsue update; reiterate BUY and C$12.50 price target
Cardinal reported in-line Q4 results and strong year-end reserves with little in the way of operations updates. Of note, Cardinal did not provide well results from its first horizontal wells at Mitsue and it appears Cardinal was not the buyer of Enerplus' recently disposed Brooks waterflood assets, which offset the company's Bantry operations.
No news at Mitsue
Cardinal did not provide initial results from its three-well Mitsue program due to delays in frac'ing operations; however, it did describe the wells as "successful", which gives us confidence that one or more generated economic initial well results. We expect the next update with Q1 results in May.
Reserves highlights
Cardinal's year-end reserves highlighted the benefits of its sustainable low-decline asset base, in our view.
• Replaced 250% of production. Cardinal replaced 250% of 2016 production on a 2P basis with drilling just nine wells and only booking FDC of $65 million, or one year of capital spending.
• 6% debt adjusted per share reserves growth. 2P reserves increased by 13% to 67 mmboe in 2016. On a debt adjusted per share basis, 2P reserves increased by 7% (basic) and 6% (fully diluted).
• 1.9x recycle ratio. Cardinal achieved 2P FD&A costs of $7.26/boe and netbacks of $13.88/boe, implying a 1.9x recycle ratio. We believe these results demonstrate that the company's low cost structure offsets its relatively lower cash flow netbacks compared to lighter oil peers.
• 12.7-year RLI. Cardinal's 2P reserve life index increased 8% to 12.7 years based on Q4 production, reflective of the company's low decline production.
• 2P NAV of $10.73 per share. Based on the reserve engineers' price deck and adjusting for year-end net debt, Cardinal calculates a 2P NAVPS of $10.73. We will review our NAV calculation upon release of the company's AIF.
Q4/16 results as expected
Q4 production and cash flow of 14,616 boe/d and $0.22 per share were broadly in line with our estimates of 14,641 and $0.25 per share. Net debt of $120 million at yearend was slightly above our estimate of $115 million. Exit production reached the 15,000 boe/d mark despite lost production time due to TCPL shutdowns and delayed fracs.
DRIP and SDP suspended
Cardinal will suspend its DRIP and SDP effective May 2017, eliminating minor dilution. Participation rates were just 4-10% in 2016.
Reiterate BUY and C$12.50 price target
We reiterate our BUY rating and C$12.50 price target which is based on our estimate of Cardinal's 2P NAV, plus upside for unbooked drilling inventory. Our target maps to a 2017E EV/DACF multiple of 10.8x vs its current multiple of 6.9x.