upgrade from Raymond James & Canaccordnot a shareholder but maybe this helps. Raymond James analyst Kurt Molnar upgraded RMP Energy Inc. (RMP-T) in response to the $80-million sales of its crude oil and natural gas interests in the Waskahigan/Grizzly, Kaybob, Gilby areas of western Alberta to Tangle Creek Energy Ltd.
The company retains its oil and gas properties at its core Elmworth operations following the deal, announced Sept. 1.
“If we assume the shareholders approve, that will leave a newco with $45-million of liquidity that is proposed to be renamed Iron Bridge Resources to target Montney in the greater Elmworth region under the new management/operations team,” said Mr. Molnar. “This news release also noted the first new well under this management being executed for a well cost of $4.4-million (versus $6-million previously). We believe this is all good news and subsequently drives our upgrade.”
Though Mr. Molnar moved the Calgary-based company’s stock to “market perform” from “underperform,” he cautioned that numerous questions remain moving forward for RMP.
“Post the closing of the deal the company expects no net debt and positive working capital of $45-million,” he said. “Beyond that, the Company has noted a plan to drill two new Elmworth wells this winter to add to the current Elmworth production of 1,400 Boed [barrels of oil equivalent per day](and the well just completed). But at those production levels, the business will have virtually no corporate level cash flow in our view (after covering overhead) so the results from new wells from the spending of the $45-million of cash will be exceptionally important. In our view it will be equally important to get new wells that are more liquids leveraged and with lower water cuts. Those will be fundamentally critical achievements to getting good enough returns on capital rather than simple leverage to production growth.
“In either regard, we would expect that RMP will likely be looking for more capital in the Spring (so those setting their targets should likely be thinking of a higher share count than today when doing so), but clearly Iron Bridge will want to be raising equity from a position of strength rather than weakness. Going forward then, watercuts, hydrocarbon cocktail, sales/transport commitments, infrastructure requirements and land tenure are all fundamental business plan details we need to learn more about before we can consider true recommendation of the stock.”
Mr. Molnar hiked his target price for the stock to 65 cents from 40 cents. Consensus is 79 cents.
“In the interim though, the balance sheet/bank review has been dealt with, the new well had promising costs and Iron Bridge will start out with healthy cash due to a strong sale result,” he said. “We have updated our model for the asset sale and then standstill assumptions on production until we get more detail on a formal 2018 business plan. The market will want to think all good things with net cash and an interesting core area, but the core questions above need to be addressed in the context of the coming shareholder considerations and the yet to be communicated 2018 business.”
Meanwhile, Canaccord Genuity analyst Anthony Petrucci raised his rating for RMP to “speculative buy” from “hold” with an 80-cent target, rising from 75 cents.
“We view the transaction as positive for RMP as it leaves the company well capitalized to delineate its Montney asset, Elmworth, which we had previously believed to be the largest driver of value for the stock,” said Mr. Petrucci. “The deal leaves RMP with $45-million in cash and no bank debt. On the back of the transaction, we have raised our target … which incorporates the $45-million in positive working capital, the four already drilled wells at Elmworth (carried at cost), and our risked valuation at Elmworth, which incorporates a 15-per-cent success rate.”