Canacord Report Upgrading to Spec Buy on March 8Reserve value holds; upgrading to SPEC BUY from Hold on improved risk/reward profile
BXE released its 2016 year-end reserves this morning and provided an operational update. While per share reserve numbers dropped materially (as expected given asset sales and the issuance of shares), overall reserve levels and reserve value held in better than we had anticipated. In addition, the early well results from the Spirit River provided in the release suggest BXE has the potential to return to a growth platform in 2017.
We are upgrading BXE to SPECULATIVE BUY (from Hold) on the back of the updated reserves, and what we calculate as a significantly lower decline rate in 2017. In addition, with the removal of essentially all bank debt, and no term debt due until 2020, we believe the risk profile has improved materially over the last year. Net debt levels and D/ CF levels remain above average, hence the Speculative rating. We have modestly adjusted our target to C$1.50 (from C$1.60), due to a reduced pace of drilling assumed in our asset valuation. BXE is currently trading at 5.1x 2017E EV/ DACF, which is a material discount to the peer group at 6.4x.
Upgrading to SPEC BUY: Why Now?
• NAV support: On our price deck we estimate a 2P NAV of $2.41/share, and a 1P value of $1.30 (Figure 8). Using futures strip pricing we calculate a 2P NAV of $1.49, in line with our current target.
• Reduction in decline rate. BXE’s decline rate has been ~40% in each of the last three years (2014 – 2016). In 2013 the company added ~24,000 boe/d of ‘new’ production, 36,000 boe/d in 2014 and 21,000 boe/d in 2015, leading to the high decline rates in the following years. In 2016 the company added just 9,500 boe/d of new production, and our modeling suggest BXE’s decline rate in 2017 will be closer to 32% as a result of less flush production (Figure 5).
• Impressive well results. BXE’s Spirit River wells are among the more prolific in the play, and the latest well results provided are ahead of type curve (Figure 4). This combined with the lowered decline rate suggests BXE is in position to grow organically this year.
• Debt termed out. With debt of just ~$26M beyond what has been termed out, BXE is in the fortunate position that it doesn’t need to ‘bank on the banks’ for liquidity. As shown in Figure 6, BXE has no debt due until 2020.
• Improved risk/reward profile. With no debt due for another 3+ years, BXE has given itself time to participate in a commodity price rally. In addition, the NAV support noted above, the discounted trading multiple (Figure 1), and the hedge book for 2017 provide some downside protection, in our view.
• Speculative rating. If commodity prices retract significantly, BXE’s share price is likely to come under pressure, given its leverage and the impact on its corporate netbacks.