Initiating coverage with a “buy” recommendation on Tuesday, he thinks its “key advantages” are not being appreciated by the market due to share price underperformance thus far this year.
“We see SGY as one of the best ways to get exposure to conventional oil plays, including the multilateral drilling evolution, our bullish view on heavy oil differentials, and a recovery in oil prices,” said Mr. Skolnick. “The company has assets in both Alberta and Saskatchewan, with a focus on its Sparky and Frobisher assets, which provide waterflood and single leg frac’d wells & open hole multilateral opportunities in Alberta and SE Saskatchewan. Both of these asset bases make up about 65 per cent of current total company production and 85 per cent of total combined capex spending. Specifically, SGY plans to spend $175 million this year to drill 67 net wells, of which 37 are earmarked for Sparky and the remaining 30 for SE Saskatchewan.
“After being the second best performing stock amongst peers in 2022, appreciating over 100 per cent, or 50 per cent greater than the group average, shares of SGY have declined almost 20 per cent year-to-date, lagging the peer group average by almost 10 per cent. We believe last year’s outperformance was due to equity torque on debt reduction and improved well results at its core Sparky and Frobisher plays. For this year, we attribute the year-to-date underperformance to the increased debt associated with SGY’s cost to acquire assets from ERF-T (Not Covered) in late 2022 and this year’s oil price volatility. This underperformance has created an opportunity, in our view, as we feel the market is ignoring the continued improvements to come at SGY, especially as the company moves into advanced development of its multilateral strategy at Sparky; as it focuses on single and multilateral drilling on the higher quality Steelman field in the Frobisher; and as it continues to develop the recently acquired assets from ERF-T, which provide exposure to higher-quality Sparky inventory.”
Believing the Enerplus deal, announced in late December, puts Calgary-based Surge “under the radar of a large group on investors” as it increases production and seeing “notable” upside from the acquired land base, he set a target of $13 per share, exceeding the $12.72 average on the Street.