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OUR TAKE: Positive. We are off restriction on SDE following the close of its $98M equity raise (including exercise of over-allotment option). The company plans to use the proceeds from the offering to fund its Duvernay growth program, with a growth target of 25 mboe/d over the next ~five years (see Exhibits 3 and 4). SDE has released positive initial results from its first four Duvernay wells, and we believe the play holds solid economic potential provided SDE can deliver results in line with our base type curve and reduce costs under a development scenario (see Exhibits 2 and 3). We expect the South Duvernay to garner a lot of attention as the year progresses with Paramount Resources (POU-T; SO) and Baytex Energy (BTE-T; SP) active nearby, and believe SDE should be able to capture more attention in the market with positive results. We have increased our target price to $7.50/share on our updated NAV and a higher target EV/DACF multiple commensurate with SDE’s growth rate. We continue to rate the stock Sector Outperform and see it as a top option for Duvernay oil growth exposure.
KEY POINTS
2025 guidance paves the way for oil focused growth. SDE set its 2025 capital budget and production guidance at $300M to $325M and 39 mboe/d to 41 mboe/d (38% liquids), respectively. Notably, SDE is targeting 75% y/y oil production growth to 5.6 mbbl/d, with a modest y/y decline for its natural gas volumes. The budget includes $200M to $215M for 17 (15 net) Duvernay wells and water infrastructure and $100M to $110M for 19 (18 net) Deep Basin wells. We have updated our estimates after reviewing the guidance and expect the company’s 2025 program to set it up for further oil focused growth in 2026. Importantly, we expect the proceeds from the equity offering to fill in most of the funding gap and keep SDE’s debt to cash flow below 1.0x.
Cash flow estimate changes. We have changed our primary cash flow estimate calculation to align with SDE’s more stringent definition of Adjusted Funds Flow (i.e., net of lease payments and ARO). As a result, the decreases to our cash flow estimates appear more significant than they are. Exhibit 1 shows the change on our previous cash flow metric (prior to lease payments and ARO). On a comparable basis, our 2024E cash flows are essentially unchanged, while our 2025E cash flows are down on the dilution from the equity raise and changes to our forecasts, and our 2026E cash flows are up ~4% on increased oil production growth (see Exhibit 1).
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