Eight Capital First Impressions SDE reported Q3/22 results last night. We see the results as positive due to a surprise special cash dividend of $0.50/share (payable on 1/16/2023), the full repayment of bank debt, and the continuation of strong well results.
Production was roughly in-line with the Street: SDE reported production of 72.134 MBOE/d versus our 69.464 MBOE/d estimate and the Bloomberg Consensus average forecast of 70.682 MBOE/d.
CFPS was roughly in-line with the Street: SDE reported CFPS of $1.15, which compares to the Street's $1.11 estimate and our $1.17 forecast. FCF came in above expectations: SDE spent $76 million (pre-A&D) and $82 million (including A&D) in Q3/22. As a result, the company generated pre- and post-A&D FCF of $124 million and $118 million, respectively, which are above the Bloomberg consensus average estimate of $86 million.
SDE fully repaid its bank debt: SDE fully repaid its bank debt during Q3 and the company’s credit facility is currently undrawn. As of September 30, 2022, SDE had $43 million in cash on hand and $150 million of long-term debt outstanding on its second lien term facility. As such, the company's quarter-end Net Debt inclusive of working capital was $143 million, approximately only 0.2x its Annualized Adjusted Funds Flow for Q3 2022.
Strong well results continue: The Gold Creek West 7-34 pad - Phase 2 (4.9 net wells) was brought on-stream in July 2022 and is averaging 1,137 BOE/d per well (667 bbls/d crude oil, 24 bbls/d condensate, 46 bbls/d NGLs and 2.4 mmcf/d natural gas) for the first 60 days of production, a 69% increase over the proved plus probable reserves type curve. The company noted that the last six months of activity have delivered the best wells ever drilled at Gold Creek East and West. SDE also has drilled some strong Deep Basin wells. To that end, the Baptiste Spirit River – 1.0 (0.9 net) well located at 102/02-16- 043-09W5 was drilled in Q3, and in its first 30 days of production, the well averaged 2,356 BOE/d (314 bbls/d of condensate, 608 bbls/d of NGLs and 8.6 mmcf/d of natural gas). The well is flowing at restricted rates due to temporary facility constraints. Additionally, the Ferrier Spirit River 10-24 pad (2.0 net wells) was brought on production in September. For its first 30 days of production, the pad averaged 1,364 BOE/d per well (37 bbls/d of condensate, 294 bbls/d of NGLs, and 6.2 mmcf/d of natural gas). Finally, for the Baptiste Spirit River 14-03 pad (2.0 net wells), the first well located at 100/13-15-044-09W5/0 achieved a 30 day average rate of 1,419 BOE/d (67 bbls/d of condensate, 402 bbls/d of NGLs and 5.7 mmcf/d of natural gas). Initial rates for the second well (100/15-15-044-09W5/0) were limited due to a casing obstruction, but after partial remediation, they are now averaging 971 BOE/d (46 bbls/d of condensate, 275 bbls/d of NGLs and 3.9 mmcf/d of natural gas). Both wells are being restricted due to temporary facility constraints, according to SDE.
2023 guidance expected to be announced before the New Year: The company expects to release its preliminary 2023 budget and guidance alongside its future return of capital strategy. This strategy may include a combination of share repurchases, base dividend payments, and/or special dividend payments.
We reiterate our BUY rating. Our $30.00 TP is based on a 50/50 blend of EV/DACF and NAVPS, based on a 2.5x fully diluted 2023E EV/DACF multiple and 1.0x NAVPS. Risks to our target price include commodity prices, cost inflation, supply chain issues, and asset performance.