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TD on PetroBakken today (PBN)PetroBakken Energy Ltd. (PBN-T) C$21.81 Q4 In Line-Prod'n Growth Potential Spooking Investors
Event Q4/10 Results In Line (Production and reserves previously released)
Impact NEUTRAL
Details PetroBakken reported Q4/10 operational and financial results that were mostly in line with our expectations. There was little new in yesterday’s release as quarterly production, YE-2010 reserves and guidance had already been released by the company (See PBN - 02/23/11). PetroBakken providedcurrent production by area/play which, highlighted growth in its Cardium play, but was offset by declines in other plays (Exhibit 2). As a result, current production is essentially flat versus Q4/10 average volumes. In our view, this gives the market some concern regarding the company’s 2011 exit guidance. Our exit volume guidance remains unchanged and about 6% below the midpoint of guidance. With only modest changes to our estimatesfollowing the quarterly release, we are maintaining our HOLD rating and $24.00 target price, although we note our subjective rating increases to 6/10 (previously 4/10) reflecting our current bias to oil weighted producers. We are encouraged by the production growth in the Cardium andrecent information regarding IP rates and lower costs from water based fracs. However, the company continues to spend at a higher rate than forecast without seeing correspondently better production volumes.
• Q4 CFPS – $0.83/share was in line with our forecast of $0.84/share andabove consensus of $0.81.
• Production – Average volumes of 41,333 BOE/d in Q4, were in linewith our estimate (not surprising since previously released). Production volumes rose 3% relative to the prior quarter but current production is relatively flat to Q4/10 volumes. The majority of this increase was from the Cardium (up 1,431 BOE/d Q/Q), offset by declines in NEBC and conventional and horizontal production in SE Saskatchewan. Notably, production from the Bakken in Q4/10 was virtually flat compared to Q3/10 – a positive sign given the company’s ~40%+ decline rates from the area. But has since declined by ~1,500 BOE/d.
• Cash Costs & Operating Netbacks – Operating cash costs (including royalties, operating andtransportation) averaged $19.75/BOE. While this is slightly higher than the group average, given the company’s crude oil weighted production base, operating netbacks averaged $48.19/BOE. We expect infrastructure build out delays and trucking relating to pipeline apportionment contributed to higher costs.
• Revised Credit Facility – PetroBakken’s credit facility increased to $1.2 billion (from $1.0 billion) aspreviously disclosed. The company has $825 million drawn on this facility, however, with 2011 capex guidance of $800 million combined with forecast dividends of $180 million, outflows exceed our ~$750 million cash flow forecast (using TD Newcrest forecast commodity price assumptions). We expect bank debt to increase to $1.1 billion by year-end (92% drawn). In Exhibit 1 we show Q4 results relative to TD estimates and prior periods.
Outlook Guidance – There was no update to the company’s guidance in its Q4/10 results. Petrobakken intends to drill ~200 net wells split between the Cardium in Alberta and the Bakken and Mississippian in Saskatchewan. According to PetroBakken, this is expected to provide a 2011 exit rate of 46,000 – 49,000 BOE/d. Our exit volumes remain unchanged at about 6% below the midpoint of guidance.
Cardium Production Shows Consistent Q/Q Growth – PetroBakken established a large footprint in the Cardium through a series of acquisitions in 2010. The company estimates it has 650 net development locations in the play with only 140 net undeveloped locations booked in its year-end reserve report. Significant capital was allocated to the development of the play through 2010, with the company drilling 75 (55 net) wells throughout the year – the majority (32.6) of these net wells were drilled in Q4. As previously released (February 21, 2011), initial 30 day production rates from 38 wells with sufficient production data averaged 245 b/d – at the upper end of the industry average and TD estimates for the play. PetroBakken advises that it currently has 36 (27 net) wells that have been drilled but have yet to be brought on stream. The completion and tie-in of these wells should help to mitigate the impact of high initial decline rates over the next several quarters. Since Q1/10, production from the Cardium has increased from 1,750 BOE/d, to current volumes of 9,500 BOE/d (see Exhibit 2). But this growth has largely been offset by ~6,200 BOE/d of declines from the Bakken over the same period. As with other operators, Petrobakken is migrating to the use of water-based fracs, which provide an average cost savings of $0.4 million/well (10-15% of total DC&T costs).
Bakken Production Declines Remain a Concern – Quarterly results from the Bakken show continuingdeclines. While Bakken production was virtually unchanged Q3 to Q4, on its conference call, the company pegged current Bakken production at 22,500 BOE/d. This highlights the high corporate decline rate (TD Estimate: ~45%). The table below outlines historical production from PetroBakken’s four key areas. Growth in the Cardium has offset declining Bakken production. While the company expects Bakken production to remain relativelyflat through 2011, given decline rates and recent history, we continue to believe this will be challenging. We have reduced our forecast for production in 2011 slightly to reflect our view that a) tie-ins during Q2 will be impacted by break-up; and b) decline rates will continue to trend modestly higher with increased horizontal drilling.
Justification of Target Price Our target price reflects a base valuation of $22.84 that combines 1.0x our modified growth NAV of $25.79 at a 65% weighting and $17.36 using an EV/DACF multiple of 6.5x 2012E DACF at a 35% weighting. This is then adjusted by a subjective factor of +5% (within a range of +/- 25% for the sector).
Key Risks to Target Price Key risks associated with our target price include business risks of the company and industry, including but not limited to: 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, environmental and weather concerns. Specific risks to PetroBakken include the impact of high first year decline rates on Bakken horizontal wells and variability in IP rates for Cardium horizontal wells.
Investment Conclusion PetroBakken reported Q4/10 operational and financial result that were mostly in line with our expectations. There was little new in the release as quarterly production, reserves and guidance had already been released. In our view, the market is somewhat concerned with the achievability of the company’s 2011 exit guidance. Our exit volume guidance remains unchanged at about 6% below the midpoint of guidance. With only modestchanges to our estimates following the quarterly release, we are maintaining our HOLD rating and $24.00 target price. We note that our subjective rating increases to 6/10 (previously 4/10) reflecting our current bias to oil weighted producers. |
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