Great Analyst opinion on Opti-Canada OPC.TO & OPCDF
This artical is dated August/11/2010...
Its from CIBC Analyst
Investment Thesis
This morning OPTI Canada (OPC - Spec - SO) issued US$100 million of
First Lien
Senior Secured Notes due in 2012 in addition to US$300 million of
First Lien
Senior Secured Notes due in 2013. The company stated that the purpose
of the
private placement is to maintain sufficient liquidity through the ramp-
up period
of Long Lake and to allow the company to continue with its previously
announced review of strategic alternatives. Overall, we view the
impact as
mixed. It is positive that the company has added to its short-term
liquidity, but
the fact that it had to do so signals that the strategic alternatives
process is
likely still a long way from completion.
While we continue to rate OPTI as a Speculative Sector Outperformer,
we have
reduced our 12- to 18-month price target to $2.10 from $2.40 (a
reflection of
the decrease in NAV). Overall, we continue to see positive risk/reward
in OPTI,
but note that it is clearly a high-risk investment given the continued
challenges
and high leverage. The company’s short-term share price performance
will
continue to hinge on one (or both) of two factors: 1) the ability to
continue to
ramp up production; and/or 2) the successful conclusion to its
continuing
strategic alternatives review process.
There is little doubt that OPTI continues to carry far too much long-
term debt
(hence the pursuit of strategic alternatives); however, its short-term
liquidity
remains in good shape following this morning’s issuance. OPTI now has
roughly
$590 million of cash and undrawn credit, which should be sufficient to
see it
through the Long Lake ramp-up even with additional well pads or steam
generation needed.
Financing Signals End Of Review
Process Likely Not Imminent
OPTI first announced a strategic alternatives review process in
November 2009.
The company cautioned at the time that strategic processes for oil
sands can
take a long time (citing Western Oil Sands, which took 18 months to
complete
its process). There has been very little public commentary surrounding
the
progress of the review process since it began. However, if a
transaction were
imminent, it is unlikely the company would have pursued today’s $400
million
financing.
While OPTI continues to evaluate all strategic options, we continue to
highlight
that the most favorable one for shareholders would be a corporate
sale. Being
nearly a year since the beginning of the process, we believe that
investors
should hopefully see the result of this “strategic alternative” before
the end of
2010. OPTI's liquidity position of $590 million provides sufficient
capacity to see
it through the remainder of any lengthy strategic review process.
OPTI's major
outlays over the remainder of 2010 include $80 million of capex and US
$110
million of interest payments.
Given the increasing interest in oil sands assets over the past 12
months, we
continue to believe that the review process results in a price well
above OPTI's
current trading range. Based on recent transaction metrics, it is not
hard to
justify a valuation for OPTI in the $4+/share range.
OPTI Gets Liquidity Reprieve; Strategic Alternatives May Still Be A
Way Off - August 11, 2010
4
Long Lake Production Continues To
Show Reasonable Momentum
Operationally, the Long Lake project continues to make progress, with
July
average production reaching 28,700 Bbl/d with an SOR of 5.2 and more
recent
production levels through 30,000 Bbl/d. While the project still has a
long way to
go to reach full capacity, the project does seem to be maintaining
reasonable
momentum and is quickly approaching cash flow break-even (at the field
level).
The company also stated that it is having to do some unplanned
maintenance
this month on its upgrader, which is resulting in a temporary
reduction in steam
injection and bitumen production. With this in mind, management has
said that
it should resume July production levels of 10,000 Bbl/d net to OPTI
within two to
three weeks. This operational update does not materially impact our
current
forecasts.
Although Long Lake is currently operating at an average SOR of 5.2
(still high),
we do note that mature wells (i.e. wells that have been on over a
year) are
seeing SORs of around 4 and are still trending down. The partners have
indicated they will add steam capacity for a cost of $150 million,
which will result
in a 10-15% increase to steam capacity. As previously noted, with this
morning’s debt issuance, OPTI will have no problems with the capital
spending
associated with a new steam generator.
This investment allows for two things: 1) it effectively makes Long
Lake capable
of producing at an SOR of up to 3.3 (vs. 3.8 previously); or 2) if the
Long Lake
project SOR is below 3.8, they would have the flexibility of selling
excess
bitumen into the market. Overall, it is a relatively low-cost
insurance policy and
increases our confidence of the project reaching full production
potential in the
2013 time frame. We are still modeling the project on the basis of a
long-term
SOR of 3.3x. Increasing the SOR to 3.8 would result in approximately a
$0.25
reduction in our risked NAV estimate (from $2.06 to $1.80/share).
OPTI Gets Liquidity Reprieve; Strategic Alternatives May Still Be A
Way Off - August 11, 2010
5
Change To Estimates/NAV
We have made a number of changes in our go-forward estimates for OPTI
on the
back of today’s US$400 million debt issuance and the associated higher
interest
expense. All of our changes to estimates are due to the company’s
increased
debt level, the most notable of which is our change in forecast cash
flow. We
have revised our 2010E diluted CFPS down 7% from $(0.88)/share to
$(0.94)/share, as well as our 2011 estimate down materially from $0.03/
share
to $(0.11)/share. With this change in cash flow, we now see OPTI
reaching
positive cash flow (on a corporate level) in 2012 versus our previous
forecast of
2011. Our free cash flow forecasts also took a hit, as we reduced our
2010
estimate down 5% to $(394) million and our 2011 and 2012 estimates
each
down 30% to $(158) million and $(132) million, respectively. The
impact of this
increased interest burden has also impacted our EPS estimates, as we
reduced
our 2010 and 2011 forecasts from $(0.90)/share and $(0.13)/share,
respectively, to $(0.95)/share and $(0.23)/share going forward.
We have made a number of changes in our NAV estimate, resulting in a
decrease to our risked NAV from $2.40 to $2.06. The largest change was
moving our NAV from year-end 2009 to year-end 2010E and incorporating
today’s debt issuance. Our revised NAV is summarized below.
As depicted, our net asset value for OPTI including Long Lake 1 works
out to
$1.16 per share under the CIBC price deck (US$85/Bbl long-term,
unescalated,
9% discount rate). The other two components of our NAV focus on the
company’s unsanctioned assets, which we provide on a risked and
unrisked
basis. The risked NAV provides a value for the specific asset that we
believe the
market should be willing to pay today or over the next 12-18 months.
OPTI’s
risked “unsanctioned” asset value is distributed amongst both Long
Lake 1 & 2,
in addition to the Leismer and Cottonwood projects.
We believe OPTI has approximately $251 million (approx. $0.89 per
share) of
risked unsanctioned value, bringing us to a total risked NAV of
approximately
$579 million, or $2.06 per share under the CIBC price deck. Our
‘unrisked’ NAV
values the company’s full contingent resources at $0.50 per Bbl (well
below
recent transaction parameters)
