Scotias take with a $6.50 CAD target price First Look – Solid Q1/19 Results; Liquids Growth on Track
OUR TAKE: Positive. AAV's Q1/19 results came in as expected with production and
cash flow in line and capital spending ~10% below consensus expectations. Looking
past the results, we see three positive takeaways from the release: 1) The company's
liquids ramp-up is on track with solid Q1/19 volumes from the Glacier Middle Montney
and upcoming production additions from richer Valhalla and Wembley plays set to
drive growth over the balance of the year; 2) The decision to tie-in wells from the
Progress block (where offsetting operators have delineated a Montney oil trend) will
open up behind-pipe volumes and enable the company to produce from the delineation
wells in its three-year plan; 3) We believe AAV's budget reduction (with no change to
production guidance) should play well in a capital conscious market and help minimize
the company's 2019 outspend.
KEY POINTS:
Solid Q1/19 results. Production of 44.9 mboe/d (95% gas) was in line with consensus
of 44.9 mboe/d (95% gas) and our forecast of 44.6 mboe/d (96% gas). CFPS of
$0.262 was also in line (Street at $0.266 and us at $0.265). During Q1/19 AAV drilled
and completed 4.7 net and 12 net wells, respectively, and commissioned its Valhalla
compression and liquids hub on capital spending of $57.4M (below consensus at $64M
and us at $60M).
Liquids growth on track. During Q1/19, AAV completed and tested its new 10-well
East Glacier Middle Montney. short term inline testing resulted in gas production rates
ahead of the company's expectations and average shallow cut NGL yields of ~73 bbl/
mmcf. Our analysis of the public data indicates that AAV delivered record March liquids
volumes (>2.4 mbbl/d) on the strength of the Glacier production additions. Following
spring break-up, AAV plans to tie-in the remaining eight wells from the East Glacier pad
and two Valhalla middle Montney wells (see our recent Well Watch Report for more
details on these wells). With these wells, the company expects ~13% q/q liquids growth
in Q2/19 to >2.3 mbbl/d.
More liquids growth planned for 2H/19. In Q3/19, AAV plans to complete and tie-in
five (4.7 net) Valhalla Montney wells and commence production from its initial Wembley
Montney wells. The company also announced that it plans to construct a pipeline
connection from Progress to Valhalla to tie-in its two standing Montney wells in the
area. We had not anticipated any production from current standing or future delineation
wells at Progress in our forecasts, so we view the pipeline connection (with no budget
increase) as an incremental positive. AAV reiterated its 2019 production guidance of
43.5 to 46.5 mboe/d (including 2.9 to 3.2 mbbl/d of liquids) and reduced its capital
budget by ~$10M (midpoint to midpoint) to $180M to $200M from $185M to $215M
previously.