Post by
PUNJABI on Dec 19, 2014 1:26pm
TD down grade LRE to $1.50
Long Run Exploration Ltd. (LRE-T) C$1.76 .... 53
HOLD (Prior: BUY);Target: C$1.50 (Prior: C$4.50)
Cuts to 2015 Budget and Dividend in Time of Flux
Action Notes December 19, 2014 53 of 151
Equity Research
Company Profile
Long Run Exploration Ltd. is engaged in
the acquisition, development, and
production of oil and natural gas in the
Western Canadian Sedimentary Basin. The
company is a balanced oil and gas producer,
with key growth opportunities in the
Redwater Viking, the
Girouxville/Normandville Montney, and the
Cardium plays in Alberta.
2011 2012 2013 2014 2015
LRE-T: Price
Please see the final pages of
this document for important
disclosure information.
Long Run Exploration Ltd.
(LRE-T) C$1.76
Cuts to 2015 Budget and Dividend in Time of Flux
Event
On Monday night, Long Run announced a 2015 capital budget and a cut to
the go-forward annual dividend to $0.21 (from $0.42). Furthermore, this
morning, we are publishing an updated commodity outlook and introducing
our 2016 estimates. On the back of a meaningfully lower WTI price
assumption (down 24% in 2015 and 18% in 2016), a shrinking production
profile, and an increasing debt burden, we are revising our recommendation
to HOLD (from Buy).
Impact: NEGATIVE
The 50% cut to the dividend was somewhat expected by the market given a
34% yield prior to the announcement, and will reduce Long Run’s cash
outflows by $40mm annually. The 2015 capital program is a significant
reduction from 2014 (down 42%), which is prudent in the current
environment, but should result in a 14% reduction in production volumes
from Q4/14 to Q4/15.
TD Investment Conclusion
In our view, Long Run has undergone a number of strategic changes in the
past few years that are yet to materialize into a concrete improvement in
either overall corporate results or share price performance. Although the
company has prudently provided a 2015 budget that should result in a 102%
payout ratio, our rating reduction is predicated on above average leverage
(now 3.5x debt/cash flow and 90% drawn in 2015), a shrinking growth
profile, and an asset mix that is still in a state of flux, in our view.
Details
Owing to the current commodity environment, the 2015 capex is 45% below
our prior estimates. Long Run is currently contemplating a 2015 capital
program of $165mm (vs. our prior estimate of $300mm) in order to remain
within a total corporate payout ratio (capex+dividends) of 100% under a
US$70/bbl WTI assumption. This revised guidance is 53% below the prior
guidance of $350mm announced earlier this June, following the Crocotta
acquisition. As a result, corporate production guidance is now expected to
average between 35,000 BOE/d and 36,000 BOE/d (44% liquids), below
Q4/14 guidance of 37.4 mBOE/d. The updated capital program results in a
10% decrease in our 2015 production estimate, ultimately resulting in a 14%
reduction from Q4/14 to Q4/15.
$90mm in capital (55% of total) will be directed to the recently acquired
Deep Basin Cardium assets. In total, Long Run spent $577mm to acquire two
Energy Producers - Junior &
Intermediate
Recommendation: HOLD
Prior: BUY
Risk: HIGH
12-Month Target Price: C$1.50
Prior: C$4.50
12-Month Dividend (Est.): C$0.23
12-Month Total Return: -1.7%
Market Data (C$)
Current Price $1.76
52-Wk Range $1.15-$6.09
Mkt Cap (f.d.)($mm) $374.2
Current Dividend $0.23
Dividend Yield 13.1%
Avg. Daily Trading Vol. (3M-All Exch) 1,721,652
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 212.6
Shares O/S (basic)(mm) 193.5
Float Shares (mm) 160.7
Net Debt ($mm) $711.5
Net Debt/Tot Cap 41.7%
Estimates (C$)
Year 2013A 2014E 2015E 2016E
CFPS (f.d.) 1.83 1.87 1.06 0.78
CFPS (f.d.)(old) -- 1.94 1.66 --
Oil (b/d) 13,232 15,511 15,865 13,373
Gas (MMcf/d) 71.2 95.2 108.6 91.6
MBOE/d 25.1 31.4 34.0 28.6
CFPS (f.d.) Quarterly Estimates (C$)
Year 2013A 2014E 2015E 2016E
Q1 0.39 0.56 0.28 0.21
Q2 0.50 0.54 0.27 0.19
Q3 0.50 0.45 0.25 0.19
Q4 0.44 0.37 0.27 0.18
Valuations
Year 2013A 2014E 2015E 2016E
EV/DACF 4.6x 3.3x 4.4x 6.0x
P/NAV MG 28.2% -- -- --
Supplemental Data (C$)
Year 2013A 2014E 2015E 2016E
WTI (US$/bbl) 98.01 93.00 65.00 70.00
ED PAR(C$/bbl) 93.42 94.60 67.30 73.30
NYMEX(US$/mcf) 3.73 4.40 3.50 3.70
AECO (C$/mcf) 3.18 4.45 3.20 3.25
F/X (US$) 0.97 0.90 0.87 0.87
All figures in C$, unless otherwise specified.
Juan Jarrah, CFA, P. Eng. Arshia Noori (Associate)
Action Notes December 19, 2014
Equity Research 54 of 151
separate assets focused on the Cardium in the Deep Basin from Crew and Crocotta this year. Although this
remains a relatively new asset to the company, the 2015 budget will see 25 wells drilled on this play out of a
total of 40 corporate horizontal wells planned during the year. Early results are encouraging at Pine Creek,
with the first three Cardium wells producing at an average IP30 rate of 315 BOE/d (49% liquids), and the
focus for 2015 will be on this play and to a much lesser extent on the existing Viking and Montney assets that
formed the basis of the company’s portfolio prior to the Deep Basin acquisitions. At the Redwater Viking and
Normandville/Girouxville Montney projects, enhanced oil recovery schemes are now a key theme in 2015 as a
means to reduce rates, improve capital efficiencies, and provide support for future dividend payments. On
these plays, Long Run plans to move to full-field development by 2016.
Long Run initially announced the conversion to a dividend paying corporation on November 7, 2013 with a
dividend of $0.402/share (annualized). The change in market sentiment as well as the recent weakness in
commodity prices has prompted a number of dividend-paying E&Ps to cut their dividends meaningfully in
recent weeks. Long Run has not been immune to this trend, and in our view, it was facing a rapidly weakening
balance sheet compounded by a number of acquisitions that were undertaken this year (specifically, the two
Deep Basin Cardium acquisitions). The 50% dividend cut will save $40mm in annual cash outlays, meaningful
to a company that we forecast will register a cash flow of $206mm in 2015. In conjunction with the significant
reduction in the capital budget for 2015, we now estimate a total corporate payout ratio of 102% based on our
US$65/bbl WTI outlook for next year. Long Run is also contemplating the introduction of a DRIP program
that could decrease the payout ratio further, although details are to be announced in Q1.
Asset sales are ongoing and will help with debt reduction efforts to a certain extent, although this may be a
challenge given the current market environment. Long Run currently has a number of outstanding asset
packages for sale in eastern Alberta, and expects to divest somewhere between 1,000 BOE/d and 4,000 BOE/d
in 2015. None of these numbers are reflected in the company’s current 2015 outlook, although we would
caution that in the current environment, sellers may have to accept a discount to the assets’ intrinsic value in
order to get a deal done. Based on an assumed range in valuation per flowing barrel of $20,000–
$30,000/BOE/d, we estimate that these divestitures could raise $20mm–$120mm.
Outlook
Our outlook incorporates a reduced spending profile relative to our prior estimates, a weaker commodity
outlook, and a shrinking production base as a result of the company’s continued focus on keeping spending in
check.
Exhibit 1. TD Commodity Price Assumptions
Δ Δ Δ Δ Δ
Commodity Revised Old % Revised Old % Revised Old % Revised Old % Revised Old %
WTI (US$/bbl) $93.00 $96.00 -3% $65.00 $85.00 -24% $70.00 $85.00 -18% $75.00 $85.00 -12% $75.00 $85.00 -12%
Brent (US$/bbl) $99.00 $102.50 -3% $70.00 $90.00 -22% $75.00 $90.00 -17% $80.00 $90.00 -11% $80.00 $90.00 -11%
WTI-Brent Diff (US$/bbl) -$6.00 -$6.50 -$5.00 -$5.00 -$5.00 -$5.00 -$5.00 -$5.00 -$5.00 -$5.00
Edmonton Light (C$/bbl) $94.60 $98.10 -4% $67.30 $88.89 -24% $73.30 $88.89 -18% $80.50 $88.89 -9% $80.50 $88.89 -9%
Syncrude (US$/bbl) $91.74 $95.56 -4% $66.32 $86.70 -24% $71.40 $86.70 -18% $76.50 $86.70 -12% $76.50 $86.70 -12%
WCS (C$/bbl) $81.88 $83.32 -2% $53.81 $73.67 -27% $57.93 $73.67 -21% $62.07 $73.67 -16% $62.07 $73.67 -16%
WCS Differential (% WTI) 20% 21% 28% 22% 28% 22% 28% 22% 28% 22%
Henry Hub (US$/mmBtu) $4.40 $4.31 2% $3.50 $3.87 -10% $3.70 $4.00 -7% $4.00 $4.00 0% $4.00 $4.50 -11%
AECO (C$/mcf) $4.45 $4.60 -3% $3.20 $3.75 -15% $3.25 $3.45 -6% $3.65 $3.75 -3% $4.00 $4.45 -10%
FX (US$/C$) $0.90 $0.91 -1% $0.87 $0.90 -3% $0.87 $0.90 -3% $0.87 $0.90 -3% $0.87 $0.90 -3%
2014E 2015E 2016E 2017E LT (2018+)
Source: Bloomberg, TD Securities Inc. estimates
Action Notes December 19, 2014
Equity Research 55 of 151
Exhibit 2. Revisions to Our Estimates
Production Revised Previous Variance Revised Previous Variance Revised Previous Variance Revised Previous Variance
Liquids (bbl/d) 17,121 17,121 0.0% 15,511 15,511 0.0% 15,865 17,703 -10.4% 13,373 n/a -
Natural Gas (mcf/d) 121,257 121,257 0.0% 95,196 95,196 0.0% 108,553 119,327 -9.0% 91,598 n/a -
Corporate (BOE/d) 37,331 37,331 0.0% 31,377 31,377 0.0% 33,957 37,591 -9.7% 28,640 n/a -
% Liquids 46% 46% 49% 49% 47% 47% 47% n/a
Financial
Cash Flow ($mm) 71.4 82.9 -13.8% 295.1 306.6 -3.7% 205.9 321.4 -35.9% 150.4 n/a -
DACF ($mm) 78.5 89.9 -12.7% 322.6 334.0 -3.4% 239.2 355.6 -32.7% 184.9 n/a -
CFPS (fd) 0.37 0.43 -13.8% 1.87 1.94 -3.7% 1.06 1.66 -35.9% 0.78 n/a -
E&D Capex ($mm) 46.0 46.0 0.0% 285.7 285.7 0.0% 165.0 300.0 -45.0% 165.0 n/a -
Total Capex ($mm) 46.0 46.0 0.0% 481.8 481.8 0.0% 165.0 300.0 -45.0% 165.0 n/a -
Net Debt ($mm) 711.5 700.0 1.6% 711.5 700.0 1.6% 714.6 759.9 -6.0% 769.9 n/a -
% Undrawn Credit 10% 12% 10% 12% 10% 3% 2% n/a
Netbacks ($/BOE)
Gross Revenue 42.48 49.58 -14.3% 54.44 56.57 -3.8% 37.98 48.86 -22.3% 41.01 n/a -
Hedging Gains (Losses) 3.73 0.87 330.9% (0.81) (1.67) -51.4% 3.68 0.89 313.9% 0.00 n/a -
Royalties (5.52) (6.45) -14.3% (6.50) (6.77) -4.1% (4.75) (6.35) -25.3% (5.13) n/a -
Transportation Costs (2.00) (2.00) 0.0% (2.01) (2.01) 0.0% (2.00) (2.00) 0.0% (2.00) n/a -
Operating Costs (13.00) (13.00) 0.0% (13.59) (13.59) 0.0% (13.00) (13.00) 0.0% (13.00) n/a -
Operating Netback 25.69 29.00 -11.4% 31.53 32.52 -3.1% 21.91 28.40 -22.8% 20.88 n/a -
General & Administrative (2.47) (2.47) 0.0% (3.40) (3.40) 0.0% (2.61) (2.48) 5.5% (3.24) n/a -
Interest Expense (2.06) (2.04) 0.9% (2.40) (2.39) 0.2% (2.69) (2.49) 7.8% (3.29) n/a -
Cash Taxes/Other 0.00 0.00 - (0.00) (0.00) 0.0% 0.00 0.00 - 0.00 n/a -
Cash Netback 21.15 24.49 -13.6% 25.73 26.73 -3.7% 16.61 23.42 -29.1% 14.35 n/a -
Q4/14E 2014E 2015E 2016E
Source: Company reports, TD Securities Inc. estimates
Valuation
Long Run currently trades at a 2013 P/NAVMG of 28% and an EV/2015E DACF multiple of 4.4x; this
compares with an average of 70% and 6.7x, respectively, for the sub-$1.5bln market cap peer group under
coverage.
Exhibit 3. Relative Valuation Summary
P/NAVBD P/NAVMG EV/1PBOE EV/2PBOE D/CF Payout Yield % Gas
(TD) (TD) (2014E) (2015E) (2014E) (2015E) (2014E) (2015E) (2014E) (2014E) (2015E) (2015E) (2015E) (2015E)
LRE 30% 28% 3.3x 4.4x $33,529 $31,074 0.9x 1.7x $9.06 $5.54 3.5x 102% 13% 53%
Peer Group Average 106% 70% 5.9x 6.7x $56,102 $49,589 4.1x 4.7x $18.87 $11.68 2.8x 174% 14% 48%
Yield 70% 41% 3.3x 4.6x $43,881 $47,125 1.7x 2.5x $16.28 $10.88 2.9x 102% 12% 19%
No Yield 116% 78% 6.7x 7.2x $58,065 $47,433 4.9x 5.4x $18.82 $11.27 2.5x 197% 0% 59%
i) EV based on forecast year-end net debt and shares outstanding, ii) Payout = (Capex+Dividend-DRIP)/CF
iii) Peer group consists of all companies under coverage with market cap less than $1.5 bln
iii) Peer group consists of all companies under coverage with market cap less than $1.5 bln
iv) Payout ratio consists of capex + dividends - DRIP, where applicable
Our modified growth NAV (NAVMG), assumes free cash flow (i.e. after 2P FDC, interest, G&A and dividends) is reinvested in company specific internal development
opportunities for up to a five year period.
EV/DACF EV/BOEPD P/CF
Source: Company reports, TD Securities Inc. estimates
Justification of Target Price
Our $1.50 target price is based on a 5.5x 2016 EV/DACF multiple, which is based on a slightly higher bias to
the historical average. Our current NAV2P is $5.92/share, while our NAVMG is $6.25/share. See Exhibit 4 for
details.
Action Notes December 19, 2014
Equity Research 56 of 151
Key Risks to Target Price
Key risks associated with our target price include business risks of the company and industry, including loss of
key employees; drilling success; volatile commodity prices; operating costs; capital cost overruns; product
supply and demand; financing/access to capital; government regulations; legislation; royalties; taxes; exchange
rates; interest rates; and environment and weather concerns.
In addition to industry risks, key near-term risks specific to Long Run include the following: 1) natural gas
weighting continues to weigh on netbacks; 2) inventory of Montney oil locations could be smaller, or gassier,
than expectations; 3) decline rates from new wells could be substantially higher than expected; 4) future
growth stems from the recently acquired Deep Basin assets; and 5) an arguably stretched balance sheet with
2015 D/CF of 3.5x.
Exhibit 4. Summary
Production 2013A 2014E 2015E 2016E Key Valuation Ratios 2013A 2014E 2015E 2016E NAV SUMMARY
Crude Oil (bbl/d) 10,372 12,382 12,603 11,623 P/CF (x) 1.0x 0.9x 1.7x 2.3x Valuation (After Tax NPV @ 8%)
Heavy Oil (bbl/d) 1,519 641 331 298 Enterprise Value ($mm) 1,126.9 1,052.0 1,055.2 1,110.4 Proved and Probable (2P) $mm $/share $/BOE
NGL's (bbl/d) 1,342 2,488 2,931 1,452 EV/DACF (x) 4.6x 3.3x 4.4x 6.0x Light Oil and NGLs 68.2 1,454.2 7.52 21.32 74%
Total Liquids (bbl/d) 13,232 15,511 15,865 13,373 EV/Production ($000/BOE/d) $44.9 $33.5 $31.1 $38.8 Heavy Oil 0.9 19.8 0.10 21.51 1%
Natural Gas (mcf/d) 71,170 95,196 108,553 91,598 EV/1P Reserves ($/BOE) $9.71 $9.06 $9.09 $9.56 Natural Gas 120.9 292.3 1.51 2.42 15%
Total Production (BOE/d) 25,094 31,377 33,957 28,640 EV/2P Reserves ($/BOE) $5.93 $5.54 $5.55 $5.84 190.0 1,766.4 9.13 9.30 90%
Y/Y Production Growth - 25% 8% -16% Debt-Adjusted Cash Flow ($mm) 244.9 322.6 239.2 184.9 Valuation (After Tax NPV @ 8%)
% Liquids 53% 49% 47% 47% P/NAV (2P) 30% Growth Areas $mm $/share $/BOE
Production Hedged (%) - 45% 32% 0% P/NAV (Modified Growth) 28% Redwater Viking 1.9 27.1 0.14 13.99 1%
Montney Oil 1.3 21.2 0.11 16.56 1%
Pricing Assumptions 2013A 2014E 2015E 2016E Leverage 2013A 2014E 2015E 2016E Deep Basin Liquids-rich Gas 10.2 14.6 0.08 1.43 1%
WTI (US$/bbl) $98.01 $93.00 $65.00 $70.00 Net Debt ($mm) 452.2 711.5 714.6 769.9 - 0.0 0.0 0.00 0.00 0%
Edmonton Par (C$/bbl) $93.42 $94.60 $67.30 $73.30 Net Debt-CF (x) 2.0x 2.4x 3.5x 5.1x 13.4 62.9 0.33 4.69 3%
WCS (C$/bbl) $75.83 $81.88 $53.81 $57.93 Credit Facility ($mm) 475.0 695.0 695.0 695.0
Nymex (US$/mcf) $3.73 $4.40 $3.50 $3.70 % Available 11% 10% 10% 2% Net Undeveloped Land $mm $/share $/acre
AECO (C$/mcf) $3.18 $4.45 $3.20 $3.25 WCSB Conventional 1,282,000 128.2 0.66 100 7%
Exchange Rate (US$/C$) 0 .97 0 .90 0.87 0.87 Cash Flow Statement ($mm) 2013A 2014E 2015E 2016E Other 0 0.0 0.00 0 0%
Realized Crude Oil & NGL (C$/bbl) $80.17 $81.77 $58.30 $64.45 Operating Activities 1,282,000 128.2 0.66 100 7%
Realized Natural Gas (C$/mcf) $3.38 $4.62 $3.36 $3.41 Net Income 24.3 69.6 (34.5) (47.4) Other Assets $mm $/share $/acre % Total
Non-Cash Items 205.8 225.5 240.4 197.8 Other 0.0 0.00 0 0%
Corporate Netback ($/BOE) 2013A 2014E 2015E 2016E Funds Flow from Operations 230.1 295.1 205.9 150.4 - 0.0 0.00 0 0%
Revenue $51.92 $54.44 $37.98 $41.01 Changes in Working Capital 4.1 (18.6) 0.0 0.0 0.0 0.00 0 0%
Hedging ($0.29) ($0.81) $3.68 $0.00 CF from Operations 234.3 276.5 205.9 150.4 Asset Value $mm $/share % Total
Royalties ($6.02) ($6.50) ($4.75) ($5.13) Investing Activities Proved plus Probable 1,766.4 9.13 90%
Transportation ($2.24) ($2.01) ($2.00) ($2.00) Exploration and Development (293.5) (285.7) (165.0) (165.0) Growth Areas 62.9 0.33 3%
Operating ($13.83) ($13.59) ($13.00) ($13.00) Acquisitions/Divestitures/Other (107.1) (200.8) 0.0 0.0 Other Assets 128.2 0.66 7%
Operating Netback $29.54 $31.53 $21.91 $20.88 CF from Investing (400.6) (486.5) (165.0) (165.0) 1,957.5 10.12 100%
G&A ($2.77) ($3.40) ($2.61) ($3.24) Financing Activities Financial Assets (Liabilities) $mm $/share
Interest Expense ($1.61) ($2.40) ($2.69) ($3.29) Change in Total Debt 162.4 154.0 3.1 55.2 Adjusted Net Debt ** (719.0) (3.72)
Cash Taxes and Other ($0.01) ($0.00) $0.00 $0.00 Shares Issued 0.2 115.4 0.0 0.0 Hedge Book (11.3) (0.06)
Cash Flow Netback $25.15 $25.73 $16.61 $14.35 Dividends/Other 0.0 (59.4) (44.0) (40.6) G&A (283.1) (1.46)
CF from Financing Activity 162.5 210.0 (40.9) 14.6 Dividend (net of DRIP) 264.3 1.37
Shares Outstanding (mm) 2013A 2014E 2015E 2016E Net Change in Cash (3.8) (0.0) 0.0 0.0 (749.1) (3.87)
WA Outstanding Shares (basic) 125.6 157.5 193.5 193.5 Net Asset Value $mm $/share
WA Outstanding Shares (diluted) 125.8 158.2 193.5 193.5 Balance Sheet ($mm) 2013A 2014E 2015E 2016E NAV (Blow Down) 1,145.5 5.92
Current Assets 62.0 93.9 93.9 93.9 NAV (Modified Growth) 1,208.4 6.25
Per Share Metrics 2013A 2014E 2015E 2016E Total Assets 1,403.3 2,160.0 2,117.2 2,109.2
CFPS (basic) $1.83 $1.87 $1.06 $0.78 Current Liabilities 528.1 734.8 738.0 793.2 SHARE COUNT USED FOR VALUATION
CFPS (diluted) $1.83 $1.87 $1.06 $0.78 Total Liabilities 786.4 1,164.8 1,156.4 1,195.8 Shares Outstanding
EPS (basic) $0.19 $0.44 ($0.18) ($0.25) Shareholders' Equity 617.0 995.3 960.8 913.3 Basic 193.5 mm
EPS (diluted) $0.19 $0.44 ($0.18) ($0.25) Liab. and Shareholders' Equity 1,403.3 2,160.0 2,117.2 2,109.2 Dilutive Securities 8.9 mm
Fully Diluted 212.6 mm
CFPS (diluted) 2013A 2014E 2015E 2016E Income Statement ($mm) 2013A 2014E 2015E 2016E Diluted Shares Outstanding (Treasury Stock)
Q1 $0.39 $0.56 $0.28 $0.21 Oil & Gas Revenue 475.1 623.4 470.7 429.9 Options Proceeds 0.0 $mm
Q2 $0.50 $0.54 $0.27 $0.19 Hedging and Other Gains/(Losses) (13.9) 14.7 45.6 0.0 Shares Repurchased 0.0 mm
Q3 $0.50 $0.45 $0.25 $0.19 Gross Revenue 461.1 638.1 516.3 429.9 Shares Outstanding (diluted) 193.5 mm
Q4 $0.44 $0.37 $0.27 $0.18 Royalties 55.1 74.4 58.8 53.7
Operating 126.6 155.7 161.1 136.3 EV/DACF SUMMARY
Quarterly Production (BOE/d) 2013A 2014E 2015E 2016E Transportation 20.5 23.0 24.8 21.0 2016E
Q1 23,611 25,613 36,193 30,840 G&A 25.3 38.9 32.4 34.0 DACF 184.9 $mm
Q2 24,431 27,602 34,458 28,894 Interest 14.8 25.1 28.5 29.7 Net Debt (769.9) $mm
Q3 25,293 34,795 33,000 27,886 DD&A 170.7 234.4 247.9 209.6 Target Multiple 5.5 x
Q4 27,003 37,331 32,230 26,966 Other 12.6 (7.0) 8.8 8.8 EV/DACF Target 1.28 $/share
Total Expenses 425.7 544.5 562.3 493.1
VALUATION NOTES Total Income Taxes 11.2 24.0 (11.5) (15.8) TARGET PRICE CALCULATION
Net Income 24.3 69.6 (34.5) (47.4) Components
NAV (Modified Growth) 0% $6.25
Reserves (mmBOE) - Sproule 2013A EV/DACF 100% $1.28
Proved Developed Producing 59.2
Total Proved 116.1 Target Price
Probable 73.9 Calculated $1.28