Mackie reportBNK PETROLEUM INC.– SPECULATIVE BUY
2018 Drilling Program Underway ACTION – Maintain SPEC.BUY; Increasing Target
BNK Petroleum Inc. (”BKX”) is developing the oil-rich Caney shale within the SCOOP area in south central Oklahoma. The company holds an average 96% working interest in 16,300 net acres of contiguous land located (Tishomingo acreage) in close proximately to other large shale players including ExxonMobil and Continental Resources. In 2017, BNK completed a highly successful drilling program which should help to de-risking of the oilrich Caney shale play and add significant reserves. Yesterday, BNK announced that it has commenced a two well drilling program that has the potential to build on the success achieved in 2017. We are maintaining our SPECULATIVE BUY recommendation and we are increasing our target price to $0.80 (from $0.60) on our expectations of substantial reserves and production growth from a successful 2017 drilling program and the potential from the current drilling campaign.
DETAILS – Drilling Update Glenn 16-2H Well Offsetting Brock 9-2H Well Currently Drilling: BKX has commenced drilling of the Glenn 16-2H (100% W.I.) which is located directly south of the Brock 9-2H well (Figure 1). The Brock 9-2H well, drilled by BKX last year, is an exceptional well that achieved a 30 day initial production (IP) rate 515 boe/d (86% oil) which is above the possible type curve rate. With close proximity to the Brock 9-2H well, we expect the Glenn 16-2H well could also be a strong well. Scott 14-2H Well to Test the Caney on the Eastern Portion of the Tishomingo Block: Once the Glenn 16-2H well has been drilled and cased the rig will move approximately two miles to the east to drill the Glenn 16-2H well. The Glenn 16-2H well is in a portion of the Tishomingo block that has no reserves or booked Caney drilling locations (Figure 1). Management believes the Caney formation carries through the remaining land to the east of the acreage as show from its previously drilled Woodford wells. If the Glenn 16-2H well is successful, then we expect substantial new reserves and drilling running room. IMPACT – Positive. Maintain SPEC. BUY; Increasing Target To $0.80
We believe the successful 2017 drilling program should result in a substantial increase in year-end reserves and boost the NPV of the company. The Glenn 16-2H well has a high probability of increasing production in the near term and the Scott 14-2H well could add substantial reserves and drilling locations. Based upon reserves at year-end 2016, BKX remains highly undervalued trading at 0.87x its EV/Proven reserves value (10% dcf - after tax) and just 0.41x EV/Proven + Probable value. We believe the stock the discount will shrink as BKX builds a larger production and cash flow base and develops and extends the boundary of its shale asset.
Thomson Chart – One Year
Corporate Profile BNK Petroleum is an oil and gas exploration and production company with a concentrated shale play located in the SCOOP area in south central Oklahoma. The company’s objective is to increase and hi-grade reserves through low-risk, appraisal and step-out drilling.
Upcoming Events - Year-end results (March 2018). - Initial drilling results of the Glenn 16-2H well (February 2018) - Initial drilling results of the Scott 14-2h well (March/April 2018).
This report has been created by analysts who are employed by Mackie Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report.
BKX - TSX $0.50 TARGET: (From $0.60) $0.80 PROJ. RETURN: 60% VALUATION:
Share Data Basic Shares O/S (mm): 232.7 Fully Diluted O/S (mm): 243.1 Market Cap ($mm): 116.3 Enterprise Value ($mm): 151.5 Net Debt (W.C.) ($mm)*: 35.2 Next Reporting Date March 2018
*As at: September 30, 2017
70% Risked NAV & 6.0x EV/DACF
YE Dec 31 2015A Q1/16A Q2/16A Q3/16A Q4/16A 2016A Q1/17A Q2/17A Q3/17A Q4/17E 2017E 2018E Oils & Liquids bbl/d 1,429 1,068 952 857 563 859 661 838 927 1,420 963 1,778 Natural Gas mmcf/d 1.6 1.7 1.2 1.0 0.6 1.1 0.6 0.8 1.0 1.5 1.0 1.620 Boe/d 6:1 1,690 1,352 1,149 1,024 661 1,045 753 970 1,097 1,670 1,125 2,047 Production Growth % 60% -20% -15% -11% -35% -38% 14% 29% 13% 52% 8% 82% Cashflow US$mm 4.8 1.2 1.8 1.4 0.5 4.9 0.9 1.1 1.7 3.5 7.2 17.9 Cashflow/FD Share US$/share 0.03 0.01 0.01 0.01 0.00 0.03 0.00 0.00 0.01 0.02 0.03 0.08 EV/DACF multiple 26.3x na 11.5x 14.1x 30.7x 15.5x 26.6x 20.0x 18.6x 9.0x 13.0x 5.9x
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Figure 1: Hartgraves, Chandler, and Brock HZ wells drilled in 2017 and Glenn and Scott new wells (show in Green).
Source: Company Presentation, Mackie Research Capital
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RECOMMENDATION
At the current market price we believe BNK Petroleum Inc. represents a good buying opportunity for the following reasons.
Management Team and Board Specialized in Shale: BKX was created as a spinout entity from Bankers Petroleum with a sole focus to explore for and develop shale oil and gas. The technical management team and Board of Directors reflect this specialized focus. As the company’s history has progressed, management has gained critical experience that is necessary to develop the Tishomingo field and eventually monetize it. The company has already proven itself a success in the past when it developed and sold its Woodford shale to Exxon Mobil in 2013.
Potential for Substantial Reserves Growth: As at December 31, 2016, independent engineer firm Netherland, Sewell & Associates, Inc. (“NSAI”) assigned 17.9 mmboe of proven reserves and 42.0 mmboe of proven plus probable reserves to the Caney formation. The engineers valued, on an after-tax basis, the 1P reserves at US$128.6 million and the 2P reserves at US$275.0 million. The remaining undeveloped acreage provides lowrisk development opportunity for the company. We believe the successful 2017 drilling program will add significant reserves and additional drilling currently underway has the potential for additional reserves additions.
Undervalued on NAV Basis: BKX is significantly undervalued based on its net asset value. We believe investors are not valuing BKX’s reserves fully but we expect this to reverse as the company continues to demonstrate an increase and hi-grading of its existing reserves through appraisal drilling.
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Figure 2: Detailed Summary and Forecasts
Source: Company documents, Mackie Research Capital
BNK Petroleum Inc. BKX
Share Data Market Value Basic Shares (mm): 232.7 Market Cap. ($ mm): 116.3$ Close: $0.50 Target: $0.80 Return: 60.0% Diluted Shares (mm): 236.3 Enterprise Value ($ mm): 148.9$ High: $0.54 Valuation: 70% Risked NAV Fully Diluted (mm): 243.1 Net Debt (W.C.) ($ mm): 32.6$ Low: $0.17 6.0x EV/DACF
Production 2015A Q1/16A Q2/16A Q3/16A Q4/16A 2016A Q1/17A Q2/17A Q3/17A Q4/17E 2017E 2018E Oil bbl/d 1,154 744 672 628 445 622 545 638 719 1,100 752 1,439 NGL's bbl/d 275 324 280 229 118 237 116 225 302 320 241 339 Natural Gas mmcf/d 1.5680 1.7 1.2 1.0 0.6 1.1 0.6 0.8 1.0 1.5 1.0 1.6 Boe/d 6:1 1,690 1,352 1,149 1,024 661 1,045 753 970 1,097 1,670 1,125 2,047 Production Growth q/q and y/y % 60% -1% -15.0% -10.9% -35.4% -38% 14% 28.8% 13.0% 52.3% 8% 82%
Cash Flow & Earnings (US$) 2015A Q1/16A Q2/16A Q3/16A Q4/16A 2016A Q1/17A Q2/17A Q3/17A Q4/17E 2017E 2018E Cash Flow $ mm 4.8 1.2 1.8 1.4 0.5 4.9 0.9 1.1 1.7 3.5 7.2 17.9 Cash Flow/FD Share $/share $0.03 $0.01 $0.01 $0.01 $0.00 $0.03 $0.00 $0.00 $0.01 $0.02 $0.03 $0.08 Earnings/FD Share $/share ($0.04) ($0.01) ($0.03) ($0.01) ($0.01) ($0.06) $0.01 $0.00 ($0.00) $0.01 $0.01 $0.05 $/Barrel of Oil Equivalent (US$) 2015A Q1/16A Q2/16A Q3/16A Q4/16A 2016A Q1/17A Q2/17A Q3/17A Q4/17E 2017E 2018E Revenue $/boe 28.87 21.70 30.20 31.85 37.15 28.98 41.45 36.16 37.06 42.10 39.47 44.21 Operating Costs $/boe 4.24 4.49 5.46 6.05 7.81 5.67 6.30 6.73 5.84 6.00 6.17 6.00 G&A $/boe/d - 11.45 10.30 9.26 6.63 9.83 13.83 11.28 7.85 6.51 9.07 5.35 Cash Flow Netback $/boe 7.80 9.53 17.23 15.30 8.42 12.88 13.07 12.91 16.85 22.80 17.61 23.96 Valuation Metrics (C$) 2015A Q1/16A Q2/16A Q3/16A Q4/16A 2016A Q1/17A Q2/17A Q3/17A Q4/17E 2017E 2018E FD Cash Flow Multiple 13.2x na 8.8x 10.9x 42.6x 13.8x 24.9x 19.0x 13.6x 6.4x 12.3x 5.2x EV/DACF Multiple 26.3x na 11.5x 14.1x 30.7x 15.5x 26.6x 20.0x 18.6x 9.0x 13.0x 5.9x EV/Production C$/mboe/d 88.1 110.2 129.6 145.4 225.3 142.5 197.8 153.5 135.8 89.2 132.4 72.7 EV/boe reserves C$/boe $3.60 $3.54 Commodity Price 2015A Q1/16A Q2/16A Q3/16A Q4/16A 2016A Q1/17A Q2/17A Q3/17A Q4/17E 2017E 2018E WTI US$/bbl 48.77 33.63 45.70 44.94 49.29 43.47 51.81 48.19 48.16 54.00 50.53 55.00 NYMEX US$/mcf 2.66 1.99 2.16 2.88 3.05 2.52 3.03 3.08 2.96 3.03 3.03 3.29 Realized Oil Price US$/bbl 46.20 30.24 42.41 42.55 46.63 54.60 48.95 46.11 46.28 52.00 63.69 66.75 Realized NGL Price US$/bbl 13.79 10.96 15.45 15.07 19.61 29.41 24.05 18.80 21.92 27.76 38.49 41.34 Corporate Natural Gas US$/mcf 2.44 1.93 1.59 2.43 2.50 2.93 3.16 2.38 2.74 2.81 3.69 3.85 Total boe US$/boe 34.08 21.70 30.21 31.85 37.12 42.29 41.45 36.14 37.04 42.10 52.99 56.79 Exchange Rate US$ per C$ 0.78 0.73 0.78 0.77 0.75 0.76 0.76 0.74 0.80 0.77 0.77 0.80 Capex and Capital Structure 2015A Q1/16A Q2/16A Q3/16A Q4/16A 2016A Q1/17A Q2/17A Q3/17A Q4/17E 2017E 2018E Capex US$ mm 0.4 0.1 0.4 0.2 1.8 2.5 10.5 0.9 7.5 2.0 21.0 18.0 Capex/Cash Flow % 8% 11% 23% 14% 342% 51% 1190% 82% 440% 57% 290% 101% Weighted Average Basic mm 162.7 162.7 162.7 162.7 220.5 177.1 232.7 232.7 232.7 232.7 232.7 232.7 Dilutive Shares mm 162.7 162.7 162.7 162.7 232.7 180.2 232.7 232.7 232.7 232.7 232.7 232.7 Market Cap C$ mm 81.3 81.3 81.3 81.3 116.3 90.1 116.3 116.3 116.3 116.3 116.3 116.3 Enterprise Value C$ mm 108.3 108.8 106.0 105.2 129.1 102.8 141.6 141.9 149.0 148.3 148.4 147.1 Net Debt (WC) C$ mm 27.0 27.5 24.7 23.8 12.8 12.7 25.3 25.6 32.7 31.9 32.0 30.8 Net Debt/Cash Flow C$ mm na 23.5x 13.7x 16.5x 25.0x 1.9x 28.5x 22.4x 19.2x 9.1x 3.4x 1.4x
Net Asset Value Reserve Estimate (31/12/2016) C$mm C$/share (mboe) Reserves (P + P) 366.9 $1.58 Proven 43% 17,974 Net Debt 32.6 $0.14 Probable 57% 24,043 Undeveloped Land - $0.00 P+P 42,017 Net Asset Value (Basic) 355.0 $1.53 Dilution 1.7 $0.01 Reserve Life Index Core NAV/FD Share 336.1 $1.42 Production Price to core NAV 0.35x 2017 2018 EV/1P Reserves Value 0.87x Proven 43.8 24.1 EV/2P Reserves Value 0.41x P+P 102.3 56.2
Stock Price Target Price
NAV, Reserves and Concessions
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RISKS TO TARGET
While this is not an exhaustive list, we view the following risks as being noteworthy to investors in BKX.
Financial Risk: BKX funds its capital program through internally generated cash flow, a credit facility and external capital markets. Should BKX produce insufficient cash flow from operations or be unable to obtain the necessary external financing, there would likely be an adverse impact on the company’s future development or production activities including a decrease or cessation of production and operations.
Credit Risk: BKX utilizes a credit facility to fund its capital program for exploration and development activities that is secured against the Tishomingo field. Failure of the company to fulfill its obligations on its credit facility could mean the loss of its Tishomingo Field and ultimately cease operations.
Commodity Price Risk: The company’s primary business is the sale of oil and natural gas. Although the company has hedged a large portion of its sales through financial commodity contracts, a prolonged or significant weakness in the price of oil and natural gas would negatively affect BKX’s cash flow and ultimately its ability to spend capital to maintain ongoing operations.
Operational Risk: BKX operates in close proximity to other operators including XTO Energy that holds the rights to the Woodford shale below. Some wells are required to be shut-in during fracture stimulations from offsetting operators for periods of time up to several weeks. This results in production disruptions from time to time. An increase in drilling and fracing activity by nearby operators could see increased production disruptions for the company that could negatively affect quarterly cash flow.
Regulatory Policy Risk: BKX operates in the United States and as such is not immune to changes in U.S. government policies that affect oil and gas companies including changes to prices, taxes, royalties and environment restrictions. The election of a new President in the United States in 2016 could see changes to energy policies that might adversely affect BKX’s future financial results.See section on Investment Risks.
RELEVANT DISCLOSURES APPLICABLE TO BNK PETROLEUM INC.
Relevant disclosures required under IIROC Rule 3400 applicable to companies under coverage discussed in this research report are available on our web site atwww.mackieresearch.com.
ANALYST CERTIFICATION
Each analyst of Mackie Research Capital Corporation whose name appears in this report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the analyst’s personal views and (ii) no part of the research analyst’s compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research report.
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