TD from beginning of July - still a good quick overview AV-T: C$1.63; ACTION LIST BUY
12-Month Target: C$3.75
We believe that Advantage's evolving business model could generate significant
value for shareholders, as its pivot towards an increased NGLs weighting should
generate material CF growth while keeping debt levels unchanged. We believe this
transition will begin to be realized by the end of 2019 with NGL volumes expected
to nearly double in both 2019 and 2020.
The current business model of Advantage is underpinned by a low cash cost
structure, low sustaining capex requirements, a well-diversified gas marketing
portfolio as well as what we consider a comfortably strong balance sheet. The near
term catalyst is that the company is in the process of delineating its acreage in the
liquids rich Pipestone area of the Montney. The material change in the company's
commodity mix will start to take shape during the second half of 2019 in conjunction
with a third party processing plant that will come on stream in Q3/19. Consequently,
we forecast the CFPS to increase y/y by 11% in 2019 and 27% in 2020, while the
estimated D/CF falls to 1.4x in 2020 from 1.8x at the end of 2019.
Based on our analysis, the company's equity is being undervalued by ~$0.6 billion
relative to the combined value of its assets (see more). Currently, the company trades
at a 2019E EV/DACF of 3.3x, which contracts to 2.7x in 2020E. This represents a
material discount to the Montney peer average of 4.1x and 4.0x for 2019E and 2020E
respectively.
We firmly believe that Advantage presents a compelling opportunity for investors on
the basis of a depressed valuation and the improving underlying business.