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Surge Energy Inc.
Surge Reveals Itself As Longview Suitor; Purchases 19.8% Ownership Block
Surge (SGY-SO) announced Friday morning that it has acquired a 19.8% ownership block in Longview (LNV-TSX) for $4.45/share (~$41MM) and that it intends to pursue a "mutually beneficial business combination" with the company.
We believe asset overlap between Longview and Surge to be fair, with the clearest overlap in southeast Saskatchewan. We note that as of Q3/13, Longview reported operating netbacks of $43.62/Boe (vs. $44.78 for Surge). Longview's decline rate is ~19% versus ~24% for Surge.
We believe a hypothetical full acquisition of Longview would be a good deal for Surge if the company can execute at a takeout price of less than $5.75- $6.00 per share.
We are maintaining our Sector Outperformer rating with an unchanged price target of $8.00. Under the forward strip price, SGY trades at a 2014E EV/DACF multiple of 4.8x and a P/Risked NAV of 63% (vs. the group at 6.7x and 77%) with a current cash yield of 9.1% (vs. the group at 6.2%).
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