RE:Onward movementTouting its “low decline, long life heavy oil asset base supplemented by complimentary Montney assets,” ATB Capital Markets analyst Patrick O’Rourke initiated coverage of Strathcona Resources Ltd. with an “outperform” recommendation. “The appeal of Strathcona’s upstream assets and business operations is demonstrated by its low corporate decline and long 2P reserve-life index of 38 years, underpinned by large heavy and thermal oil assets in the Lloydminster and Cold Lake regions, where high quality Montney assets in the liquids-rich fairway at Kakwa and Pipestone provide a natural hedge to gas and diluent heavy oil inputs and further commodity diversification,” he said.
In a report released Thursday, Mr. O’Rourke said he sees the Calgary-based company, which entered the public markets through its late 2023 acquisition of Pipestone Energy Corp., transitioning to organic growth following a “strong track record” of gains by acquisition. He’s forecasting fourth-quarter 2023 total corporate production of 184,100 barrels oil equivalemnt per day, growing to 190,800 boe/d in 2024 and 209,500 boe/d in 2025.
“Management has a strong track record of accretive growth through acquisition in its key assets, growing production by 308 per cent to an ATB estimated 155.0 mboe/d in 2023 (from 38.0 mboe/d in 2020) primarily through its acquisition strategy. However, given that growth has primarily been achieved through acquisitions and not organically to date, some questions have emerged from investors with respect to forecasting the operational acumen of SCR’s technical team. In our view, with the deep and long industry tenure of key management personnel (outlined in our management analysis section), as well as our asset level analysis of the Company’s asset growth and unit operational cost improvements, we believe that we are seeing early indications of strong operations with ample room for significant production and CF growth in both the near- and long-term; operating costs per boe have been noticeably improving over time, while production has been steadily growing, with the Company achieving record Q3/23 thermal oil sales volumes of 57.9 mboe/d and record low thermal oil opex of $17.82/boe (vs a high of $24.78/boe in Q2/22, with quarterly production of 50.4 mboe/d).”
The analyst also emphasized the company’s capital structure transition and a shift to a return model is now important for its shareholder return profile.
“The Company’s current public float is currently limited to approximately 9 per cent of the outstanding 214.2 million shares, which is limited relative to the size of both the production base and overall enterprise value/market capitalization, and is likely to continue to induce a near-term minority interest and liquidity market discount in shares, comparative to similarly sized peers,” the analyst said. “There are several potential paths to improved liquidity and reduced liquidity risk discounts over the next several years; the timing of these events can be difficult to predict, but those investors willing to tolerate liquidity risks in the near-term stand to potentially benefit in terms of equity performance from reduced liquidity discounts over the medium and longer-term. Additionally, we estimate that SCR will exit 2023 with $2.6-billion of net debt outstanding, relative to the Company’s $2.5-billion net debt target at which point the Company will potentially initiate a formal shareholder return of capital program, assuming our ATB estimated 2024 oil price of US$75/bbl WTI. While SCR has significant future shareholder return potential, its near-term 2024 estimated FCF/EV yield of 8.9 per cent (vs average of peers at 10.5 per cent) ranks at the lower end amongst its peers in our coverage, we believe that the appropriate context is to normalize for PPS growth—with 2024 estimated year-over-year PPS growth rate of 15.0 per cent (vs average of peers at 6.5 per cent), SCR then becomes the most attractive total FCF/EV Yield + growth total shareholder yield of 23.9 per cent (vs average of peers at 17.0 per cent). SCR also offers 2024 estimated CFPS growth of 30 per cent (vs peers at 15 per cent) and trades at a 2024 estimated EV/DACF of 3.7 times (vs peers at 5.1 times).”
Mr. O’Rourke set a target of $31 for Strathcona shares. The current average on the Street is $32.31.