Pulled the following analyst updates from the IV Board. I see there is quite a divergence in opinions. TD has a less-than-stellar view for Arcan's future prospects.
scotia update $2 target
Change in Tone is a Positive
Event
¦ ARN announced updated reserves, an ops update and facility renewal.
Implications
¦ Updated Reserves. ARN announced that its $200MM credit facility has been renewed on
account of an updated reserves estimate from GLJ. ARN estimates its revised NAVPS at
$4.37 on updated P+P reserves of 35.7mmboe, which includes 153 booked locations (78 net
PDP wells). Reserves have been partially recorded on 65 sections, with another 87 sections
of land held (no assigned reserves). Under our price deck, the pro-forma NAVPS is $0.79
on a 1P basis and $2.99 on a 2P basis. ARN currently trades at ~30% of our 2P NAVPS
estimate.
¦ Ops Update. ARN reported Q3/12 volumes of 3,900 boe/d and expects to average 4,500
boe/d for the year. Completion operations are underway on ARN's inventory of 4 wells in
northern Ethel, and a successful oil well was drilled at Gere to retain 20 sections.
¦ Our Take. Overall, we believe that the tone of communication has shifted to a stronger
focus on execution and cost control combined with reasonable expectations for the BHL
play and corporate growth, which we view as a positive step.
Recommendation
¦ We maintain our 2-SP rating and have revised our target to $2.00 in light of the updated
NAVPS estimate. We continue to believe that the market will be watching for evidence of
sustained execution and financial prudence over the coming quarters before assigning a
higher valuation
TD - Arcan Resources Ltd.
(ARN-V) C$0.92
Moving to a REDUCE on Operational Outlook
Event
Arcan announced an operational update pre-market yesterday which sent the stock price up 15.0% on nearly double the 30-day average volume. While the update seemed to have allayed investors’ fears of a Proved DevelopedProducing (PDP) reserves write-down, the operational outlook looks grimmer to us than we had initially expected.
We are reducing our target to $0.75 (from $1.15) and are downgrading our rating to a REDUCE (from Hold).
Key highlights are:
1. PDP reserves increase to 10.8 mmBOE (from 10.6 mmBOE as at yearend 2011) and the $200mm credit facility remains unchanged.
2. Q3 production is expected to average 3,900 BOE/d, which, even when accounting for dispositions, is significantly below the Q2 average of 5,254 BOE/d.
3. Operating costs remain high at $25/BOE, well above the $14/BOE guidance target.
Impact NEGATIVE. The $200mm credit facility remains unchanged and PDP reserves are in fact revised higher, both of which serve to put the market at ease – given a concern with a negative revision to both. However, the company is not out of the woods yet operationally, and equity investors continue to look at a shrinking ownership of the asset as debt continues to mount. With an M&A catalyst that looks increasingly unlikely over the coming quarters, there may be more risk to the downside, hence our revised rating.
CIBC Update on Arcan Resources Ltd.
Arcan Resources Ltd.
Reserves Update, Operational Update And Bank Line Reaffirmed
The company reported updated P+P reserves, which declined by 13% from
year-end December 2011 to 35.7 MMBoe (including dispositions). Our Core NAV decreases to $1.27/share from $2.10/share previously. In conjunction with the reserves update, the bank line was reaffirmed at $200 MM
Q3/12 production is expected to be 3,900 Boe/d, in line with our estimate.
However, operating costs were very high at ~$25/Boe due to wet weather
and infrastructure costs ahead of the Ethel pipeline start-up. We believe it is
imperative that the company reduce costs going forward.
While the company might get a decent bid for its extensive land base, we
feel the risk/reward proposition is not compelling enough. We believe the
company's debentures would be a more appropriate way to invest in the
company, given its seniority to equity-holders in the event of a takeout.
Arcan trades at a Price to Risked NAV ratio of 72% and a 2013E EV/DACF
multiple of 7.0x (versus the group at 87% and 6.8x, respectively). We have lowered our price target from $1.45 to $1.20 per share, reflecting our updated NAV. We maintain our Sector Performer rating.