Eight Capital - Completes acquisition of Simonette assetsWe reiterate our BUY rating and our C$1.85 target price after coming off restriction as Eight Capital was a co-lead underwriter on the recently closed secondary equity issuance as well as a financial advisor of the recently closed Simonette acquisition. LGN announced on 11/16 a strategic Simonette Montney asset acquisition from GTE-T (BUY; TP: C$19.00) plus an associated $35 million secondary offering that was subsequently raised to $45 million. We view the acquisition positively due to the following reasons:
It increases LGN’s multi-year growth: The acquisition includes current production of approximately 795 BOE/d (48% liquids), 25 net (52.5 gross) sections of highly prospective Montney acreage including 45 net identified Montney drilling locations, and 22.5 net booked locations in the Simonette North Montney. As a result of the transaction, LGN now plans to achieve production growth of 24-27 MBOE/d by 2028, up from its previously stated target of 20-25 MBOE/d by 2028. This is a total implied growth of ~75%-100% from LGN’s 2025 estimated pro-forma production of 13.65 MBOE/d.
It improves LGN’s economic position at Simonette: It provides top-tier Montney oil drilling locations with the South Simonette Lower Montney having a forecasted type curve of 520 MMBbl of oil that is expected to deliver a NPV of approximately $14 million discounted at 10% before-tax at sub US$80 WTI. Additionally, it removes the 5-10% GORRs from 38 of LGN’s net Montney locations, improving project economics. Furthermore, two-layer co-development of Lower and Middle Montney improves capital efficiencies and reduces proportionate infrastructure spending. The strong synergies with LGN's existing owned gathering and processing are expected to result in operating cost savings of over $7.5 million in the first five years of development on the acquired assets. It also eliminates approximately $13.0 million in near-term infrastructure capital from LGN's current five-year plan. Finally, it is expected to improve the company’s realized pricing due to the increase in liquids weighting, while maintaining the company’s long term cost structure (operating expenses are forecast to be less than $8.00/BOE by 2027).
It gives LGN more opportunities to generate improved results with longer laterals and greater frac intensities: The region has been undergoing significant development, with well productivity experiencing a significant benefit from the implementation of longer lateral lengths and increased frac intensity as discussed on pages 3 & 4. The use of improved techniques has been a key to LGN’s success leading it to dominate the Top 20 well list (Figure 3). This should benefit both LGN and GTE.
It increases LGN’s RLI: As shown in Figure 5, the company’s PDP and Proved + Probable RLI increase by ~9.5% and ~19% to 3 and 24.5 years, respectively. Of note, there is a good correlation between 2P RLIs and EV/2025E DACF multiples, as noted by the ~43% R2 (Figure 8).
We have improved our 2025 estimates to reflect the acquisition and equity issuance: We have also adjusted our 2024 estimates to reflect guidance that was updated in the 11/26 press release. Refer to Figures 4 & 5 for more details.
Bottom line: LGN screens at the top on absolute production and production per share growth. It also screens amongst the top on an RLI and capital cost efficiency basis, which justifies its premium EV/DACF multiple (Figures 6-8).
Our C$1.85 target price is based on a 50/50 blend of 1x risked NAV and 3.5x EV/2025E DACFs. Risks to our target price include commodity prices, cost inflation, rig & crew availability, and asset performance. Risks to our target price include commodity prices, cost inflation, rig & crew availability, and asset performance.