More from RBC (Base Case Target Price $11; Upside $13) May, 5, 2017
Target price/base case
Our base case and $11.00 price target reflects Cardinal's topquartile
sub-15% decline rate and resulting sub-100% payout
ratio, and a strong financial outlook that allows Cardinal to
maintain its $0.42/share dividend for a 3.8% cash yield. Our
base case maps to 1.0x P/NAV (fully-risked NAV) and 8.4x
2017E EV/DACF (excluding realized hedging) multiples.
Upside scenario
Our upside valuation of $13.00 is based on successful
derisking of Cardinal's 200+ well unbooked drilling
inventory, sustainable 5–10% dividend growth from accretive
acquisitions, and no change to the company's financial
outlook. Our upside case maps to 1.1x P/NAV (fully-risked
NAV) and 9.8x 2017E EV/DACF (excluding realized hedging)
multiples, with no change to our commodity outlook.
Investment summary
We rate Cardinal Energy shares Outperform with an $11.00
price target.
• Staying power: Cardinal's staying power comes from its
best-in-class sub-15% decline rate. The low decline rate
allows for a sub-100% all-in payout ratio in 2017E and FCF
optionality to drill, acquire, or increase its dividend in a
normalized commodity environment.
• Experienced leadership team: Management's extensive
track record includes the sale of five growth-oriented
E&Ps, all delivering positive returns. This time, Cardinal's
game plan revolves around decline-rate management and
accretive acquisitions to grow production and dividends.
• Attractive upside: A profitable 130-well development
inventory in a Glauconitic tight oil play offers additional
upside, valued at $2.49/share on an unrisked basis plus 70
unbooked Mitsue locations for $0.91/share unrisked.
• Strong financial outlook: We project Cardinal to be $68
million drawn on its $150 million bank line at YE17, plus $50
million convertible debentures (5.5% coupon, maturing Dec
2020 with a $10.50 conversion price), which maps to netdebt-
to-trailing-cash-flow ratio of 1.4x.
• Risks: Include variable drilling results, a prolonged decline in
oil prices, fiscal changes, and access to capital and producing
oil-weighted properties at a reasonable cost.