Verbonac updates MMT target to 90c. Not much, but at least something. He was calling for 75c while we were at 60some, so now his call to 90c looks much better with MMT below 60c. Of course 90c looks still really conservative, MMT should be trading north of 1 buck already...
INTERNATIONAL OIL & GAS COMMENT
Drilling News Pummel Stocks
Warren Verbonac 403-205-2224 wverbonac@union-securities.com 18-May-11
Market Sentiment
The dominant theme affecting international junior oil and gas stocks for much of this year has been negative, with the market over-reacting to drilling results – not only dry holes, but also when successful holes are not up to expectation. This short term thinking flies in the face of the realities of exploration – dry holes are part of the process of exploration and bringing discoveries onstream, but bad news in a bad market has been causing an over-reaction.
Having just completed the calculation of asset values on the recently released 2010 reserve reports and financial statements (shown below), the discount to asset values is extraordinary, and indicative of a bottoming of the market. Investors should take a hard look at these discounts; this is an excellent entry point for many of our names. To make the comparisons as fair as possible among a variety of political jurisdictions, the following table uses after tax numbers to reflect the maximum government share of production and revenues and may be overly punitive in specific cases.
All of our stocks who are producing oil receive Brent pricing, which is on trend to setting a record this year. Those companies who produce gas received prices ranging from $9.00 - $11.00/mcf in Q1/11.
Ithaca, Mart, Sterling and Winstar are trading at very attractive valuations relative to asset value. Ithaca, Mart and Winstar are also attractive on a multiple of this year’s cash flow.
Company Comments
Cygam Energy – CYG-TSXV, $0.43
Stock Rating: Buy Target Price $1.00
Sud Ramada
Cygam, as of this month, has a new management team in place that is in the early stages of ramping up the activities of the Company. Gary Hyde is the new Chief Executive Officer, Brad Goldie is the new President, and Alistair Robertson is now the Chief Financial Officer. All three have extensive experience in the international oil and gas arena, and are developing a strategy to increase the growth profile of the Company.
The Company may issue a revised Annual Information Form, and thus the asset value shown in the foregoing table may be revised.
We continue to recommend purchase of the stock, based on the potential of the Tunisian and Italian assets, and maintain our target price of $1.00.
Ithaca Energy – IAE-TSXV, $2.03
Stock Rating: Strong Buy Target Price $4.00
Ithaca announced a dry hole today on the Jacky field (47.5% interest), a location that was drilled to maximize the recovery of the field. The hole encountered oil, but was too thin to be good producer (water incursion may have occurred early); it may instead be used as a water injector and thus serve the same purpose. Production may be effected downward by a few hundred barrels a day; however, by year-end, production is estimated to double to 10,000 bd, from the Cook and Athena fields (to be followed by Carna, Stella, and Harrier), a doubling from the current estimate of approximately 5,000 bd.
The stock was down over 10% on the news of the Jacky location; a large drop considering Jacky’s 2P reserves of 1.2 million barrels represents 2% of the Company’s 51.8 million barrels (including the Cook acquisition in 2011). We expect to see the stock price advance as we approach the onstream date of Athena later this year. Drilling of the horizontal leg is currently underway at Athena – results of which could possibly be the next news event.
Our Strong Buy recommendation is based on the growth in production and cash flow that is underway. The stock is trading at 3.1 times this year’s cash flow of $0.65 and at a 40% discount from asset value. In 2012, cash flow could be close to $1.00. We maintain our target of $4.00
Mart Resources Inc. – MMT-TSXV, $0.58
Stock Rating: Speculative Buy Target Price $0.90
Yesterday, on the basis of the 2010 operating and financial results, and the potential of the next drilling location, we raised our target to $0.90, reflecting the growth potential of a high productivity oil field in Nigeria. We maintain our Speculative Buy rating and target of $0.90. Warren Verbonac 403-205-2224 | wverbonac@union-securities.com EQUITY RESEARCH REPORT
Sterling Resources – SLG-TSXV, $1.88
Stock Rating: Strong Buy Target Price $6.00
Sterling’s stock has been more than cut in half from its (very) recent high of $4.94, the result of an unfortunate coincidence of bad news in a bad market. Romanian government intransigence and two dry holes at Cladhan have taken the stock to 80% of our $2.50 proven and probable asset value – largely based on just the Breagh field.
A more appropriate number would include the possible reserves, since the field is still in the development stage, and since the Company’s tax pools will shelter it from years of taxation, the 3P pre-tax calculation shown below is relevant, and conservative considering there are no reserves booked for the Cladhan field, which is an economic discovery and will be onstream in 2014.
Forecast Pricing Before Tax After Tax P.V. 10% mmboe mm /boe Reserves Proved 23.7 $377.7 $15.94 Probable 9.1 $124.9 $13.73 Possible 8.2 $120.9 $14.74 Total 41.0 $623.5 $15.21 Working Capital $138.4 Debt $0.0 Net Asset Value $761.9 Shares Outstanding, Basic 152.7 Asset Value per Share, Basic $4.99
Sterling is our top pick for long term investors seeking a diversified exploration and development opportunity. Cladhan, despite some reduction in its ultimate upside, will likely rival Breagh in valuation once reserves are booked. We maintain our Strong Buy and target of $6.00.
TransGlobe Energy – TGL-TSX, $12.43
Stock Rating: Buy Target Price $16.00
TransGlobe has held up relatively well amongst the other companies in our group, nonetheless it is off almost 40% from its high of $20.35. The Company recently achieved record production of almost 12,000 bd, despite Yemeni production of 2,300 bd being shut in. New production guidance will be issued shortly, and we expect the Company could be up to close to 20,000 bd by year-end, a two-thirds increase which is significant coming off of TransGlobe’s high current production volume.
We maintain our Buy rating and target of $16.00. Warren Verbonac 403-205-2224 | wverbonac@union-securities.com EQUITY RESEARCH REPORT
Winstar Resources – WIX-TSX, $3.70
Stock Rating: Strong Buy Target Price $7.50
Winstar’s stock has suffered from disappointment in what was a successful deep Silurian well in Tunisia. The well initially came onstream at approximately 300 bd; a gas plant is on its way to the well which will allow a higher pressured gas liquids zone to be brought onstream. Expectations are for the well to be able to produce about 1,000 boed. Recent gas prices have been close to $11/mcf, among the best in the world.
Winstar could exit 2011 with at least a 50% increase in production, and possibly a doubling, from the 1,737 reported in Q1/11.
With the stock trading at 2.6 times this year’s cash flow estimate of $1.65, and at half of its 2010 year-end asset value of $7.48 per share, the stock is one of the more compelling value and growth situations in the market.
