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Upgrading On Valuation And Bias Towards Junior Oils
As of 7/16, we upgrading our rating to SO (from SP) but reducing our price target to $2.75 (from $4.75), reflecting our lower commodity price assumptions. With the recent sell-off of Arcan's shares, we believe the shares have become more attractively valued.
As we have highlighted in our recent report, Oil Economics In Western Canada, companies like Arcan operating in the Beaverhill Lake require strong productivity in order to justify the higher well costs associated with the play, but offer great torque to crude oil prices.
Notwithstanding these higher costs, which are incorporated in our Risked NAV, we believe the company is trading inexpensively on fundamental value. We also believe junior oil-weighted companies as a whole will outperform over the next three months.
Arcan trades at a P/RNAV ratio of 47% and a 2013E EV/DACF multiple of 4.7x (versus the group averages of 73% and 5.6x, respectively). We believe the next catalyst will be initial results from the company's Ethel area waterflood.
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