BMO on CJ with Target Price of $11 May 5, 2017
Q1 Results; Encouraging Mitsue Well Results
Bottom Line: We maintain our Outperform rating on Cardinal Energy. We view the
Mitsue drilling results as being the key highlight of the quarter, particularly the strong
rates from two of the three wells. This is in spite of the Q1/17 cash flow miss versus our
expectations and consensus.
Key Points
Q1/17 Results. CFPS of $0.19 was below our estimate and consensus of $0.23.
Production averaged 15,168boe/d (86% oil and liquids) vs. our 15.4mboe/d and
consensus 15.3mboe/d. The cash flow miss was a result of higher operating costs of
C$22.90/boe due to the Alberta Government's carbon tax program. Operating costs are
expected to drop to C$20.00/boe in 2Q and remain in this range for the remainder of
the year. Current production is ~17,000boe/d.
2 out of 3, but results positive at Mitsue. Cardinal drilled and completed three
horizontal multi-stage frac wells at Mitsue. The first well (11-18) was drilled and
completed in an area of tighter reservoir and produced an average of 533 boe/d
(30 days). The second well (9-35) was drilled in an area of better quality reservoir
and flowed at 223boe/d (30 days). The final well (16-9) was drilled to exploit a
third concept, but only came on at 50boe/d. Results from the 16-9 well were below
expectations due to not accessing the reservoir continuously through the horizontal
section. Cardinal sees up to 140 locations on its Mitsue property based on the results
to-date. Despite one of the wells coming in below expectations, we are nevertheless
encouraged by the economics/potential at Mitsue.
Bantry operations. At Bantry, the company's most recent 16-26 Glauconite horizontal
well had an IP30 of 518 boe/d. Cardinal expects to drill and complete eight of its nine
planned Bantry wells by the end of Q2.
Valuation & Recommendation. After a tough Q4/16 and a transitional Q1/17, we
expect results for Cardinal to improve over the next year, particularly with the next
round of Mitsue drilling results. The company also continues to seek out accretive
acquisitions. We like the risk/reward setup with the name, particularly with the 6.8%
current dividend yield and inexpensive valuation.
Valuation
On the BMO price deck, Cardinal currently trades at 6.0x
2018E EV/EBITDA versus the peer group at 6.6x. Our target
price of C$11.00 is based on 9.5x 2018E EV/ EBITDA.
Upside Scenario $12.00
In a more constructive oil price environment, we would
expect a 10% premium to our target 2018E EV/EBITDA
multiple at 10.4x for a price of C$12.00.