<<NEGATIVE – Lone Pine reported weak Q4/12 financial results and year-end
reserves. Although Q4/12 production was in line with our forecasts, reported
CFPS of $0.19 was materially below our $0.26 estimate (consensus $0.23)
due to a combination of lower-than-forecast revenue and higher cash costs.
Meanwhile, YE-2012 2P reserves included a 20-mmBOE technical writedown (72% oil). Our target price drops to $1.75/sh (down from $2.00) on
lower 2013 cash flow. We are revising our recommendation to SPEC BUY
(from Buy) and increasing our risk rating to SPECULATIVE (from High) to
reflect our concerns regarding the company’s debt situation and lower crude
oil reserves. Lone Pine indicated that absent a relaxation of the Debt/Trailing
EBITDA covenant in its lending facility, which is under review, its bank
facility could be lowered by ~$100 million, leaving limited undrawn capacity.
YE-2012A Reserves – Lone Pine reported 2P reserves of 89.2 mmBOE. While this is only 11% below our
forecast of 100 mmBOE, it was materially more gas-weighted than we had anticipated. Most notably, Lone
Pine experienced a 20.5 mmBOE negative technical revision, with 14.8 mmBOE of this associated with oil.
After reviewing the latest well production, we see that Evi wells have underperformed the initial 10 frac typewell (EUR-200 mBOE) and 6 frac type-well (EUR-140 mBOE). We understand that at Evi, Lone Pine’s
reserve evaluators had previously booked 2P EUR of 145 mBOE; however, this has now been revised down to 133 mBOE based on well performance. The company advises it has booked 237 undeveloped locations at Evi.>>
The writedown may not affect Pinecrest wells since they have been drilled with longer horizontals and more fracs. However, with the noted underperformance of the wells, it may well be that PRY's reserve estimations have been lowered also. If this is the case, only an upward adjustment due to waterflood will offset.
Terr