Maison Monthly June 5, 2006 CAPP Conference Edition (June 12 to 14 )
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Maison Monthly June 5, 2006 CAPP Conference Edition (June 12th to 14th) What’s Inside: 1. Maison Coverage List Updates: • Accrete Energy (GZ) • Bow Valley Energy (BVX) • C1 Energy (CTT) • Centurion Energy International (CUX) • Defiant Resources (DFR) • Delphi Energy (DEE) • Find Energy (FE) • Galleon Energy (GO.A) • Gentry Resources (GNY) • Geocan Energy (GCA) • International Frontier Resources (IFR) • Niko Resources (NKO) • Oilexco (OIL) • Real Resources (RER) • Solana Resources (SOR) • Sterling Resources (SLG) • Vero Energy (VRO) 2. Recommended Buy List 3. Coverage List Josef I. Schachter, CFA, CMA 403.264.4413 [email protected] Brenda Asplund, BA 403.233.8483 [email protected] Jason White, B.Sc., EIT 403.451.9287 [email protected] Purdy Mackenzie 403.264.5777 [email protected] Lee Raffey, B.Kin 403.264.5777 [email protected] Josef I. Schachter, CFA, CMA (403) 264-4413 [email protected] Maison Brenda Asplund, B.A. (403) 264-5777 [email protected] Placements Jason White, B.Sc., E.I.T. (403) 451-9287 Canada [email protected] June 2, 2006 Accrete Energy Inc. GZ $7.44 Outperform Potential Upside 75% Target Price $13.00 2005 2006 2007 Actual Estimate Estimate Production Reporting Periods Oil & Liquids b/d 448 835 1,140 Year-end: Dec 31st Natural Gas mmcf/d 5.0 11.7 16.0 Next report: Q2 Aug/15/06 Total 6:1 1,276 2,780 3,800 Shares O/S Volume Growth 419% 118% 37% Basic: 15.2M Per million shares 83.9 166.5 227.5 Fully diluted: 16.7M Gross Wells Drilled 32 40 45 Financial Data Volumes Mix % Market Cap $M: $113M Oil & Liquids35% 30% 30% Enterprise Value $M: $138M Natural Gas65% 70% 70% Enterprise Value per Financials 2006 exit production $: $40,588 Cash Flow/Share $0.90 $1.82 $2.74 Reserve Life Index (years) Dec 05 Price/Cash Flow 8.3x 4.1x 2.7x Proven: 7.2 Capital Exp $49M $35M $45M P+P 10.8 Cash Flow $14M $30M $45M Net Asset Value @ 10% BT CapEx/Cash Flow 3.6x 1.2x 1.0x Dec-05$ 8.05 Debt Apr 06 Commodity Prices Debt Line: $40M (SAMI forecasts) Actual Estimate Estimate Debt Utilized: $25M US$ WTI $56.70 $54.00 $54.00 Insider Ownership 31% C$ AECO$8.90 $9.00 $9.00 CEO:Peter Salamon 1.0M CFO: Thomas Dalton 167k Quarterly Results Exec VPRay Dobek 641k Production (b/d) Cash Flow per Share 2005 2006e 2007e 2005 2006e 2007e Q1 1,010 2,224 3,200e 0.14 0.35 0.58e Service Providers Q2 668 2,500e 3,600e 0.09 0.37e 0.65e Bankers: National Bank of Canada Q3 1,202 3,100e 3,900e 0.22 0.51e 0.70e Auditors: KPMG LLP Q4 2,216 3,300e 4,500e 0.46 0.59e 0.81e Engineers: GLJ Exit 2,300 3,400e 4,600e The analyst(s) and/or immediate family member(s) have a direct/indirect ownership in this company's shares Accrete Energy Inc. Suite 2100, 500-4th Ave SW Calgary, AB T2P 2V6 Phone 403 269-8846 Fax 403 269-8366 Website: www.accrete-energy.com Company History & Management Info: Accrete was formed in June 2004 after the sale of the Olympia Energy Inc. to Provident Energy Trust with a newly incorporated exploration company spin-out (GZ). The goal of the company is to grow production quickly then maximize shareholder value once again. Management team: Peter Salamon–President & CEO Ray Dobek–Exec VP Exploration Tom Dalton–VP Finance & CFO Core Areas: Currently Accrete has 37k net acres with options on 19k additional acres. The two core areas for development and growth are at Harmattan and Claresholm with the prize on these lands potentially in excess of 10MB. The greatest near term exploration potential for the company exists at Edson. Key Impact Plays / Black Gold Wealth Creation: At Harmattan, the company has multiple development locations on it’s 20 sections land spread. Production is currently 1,600 boe/d with an additional 600 to 800 boe/d behind pipe due to facility constraints. The recently completed 10 mmcf/d processing facility is currently at capacity and we expect additional compression to be added increasing the capability to 14 mmcf/d by June 2006. Development is progressing with 37 of the 68 planned locations having been drilled and 38 of 48 encountered productive zones have been completed. Accrete will have two service rigs completing bypassed productive zones in the coming months. Five Cardium wells are planned for 2006 with a focus on higher working interest lands in order to raise Accretes’ average WI in the project to >75% from 67%. The Cardium trend plays have potential to IP at 60-160 boe/d of 48-degree oil, liquids rich gas and natural gas to a depth of 2,500 metres. A recent well, 14-14 IP’d at 1 mmcf/d with 80 b/d of associated oil. The goal is to find 3-4 metres of pay. The company is planning to drill-to-fill and bring on new production as the existing wells decline. New play possibilities on these lands include the Lower Mannville Basalt Quartz and Viking plays along with delineating the western extent of the Upper Cardium Shore Face Conglomerate trend. The Lower Mannville Channel wells are relatively deep drills to 2,900m and have the potential to IP at 0.5-1 mmcf/d. The Upper Cardium play has several development locations with 4-5 Bcf per well with IP rates of approximately 1 mmcf/d. This play has the potential to almost double GZ’s proven reserves. The majority of locations at Harmattan have dual zone potential (upper and lower sands) with the intent to co-mingle production. To the NE of the existing pool development GZ sees another Cardium sand for further development. Harmattan was evaluated with 6.3 Mboe of P+P reserves with an estimated productive capacity of 750k barrels per year. We anticipate the reserves to increase significantly in the coming year as well production data increases and the evaluators become more comfortable with the play. This long RLI property (~10 years) is an ideal asset for oil and gas trusts for which we expect that a premium will be paid. With Edson Accrete has farmed in on 13 sections of 100% WI lands and is currently working on adding a greater land position. The area has multi-zone potential in a Cardium trend, Viking, Basalt Quartz and Rock Creek formations. Accrete’s management and exploration team is familiar with the regional play types as previous company iterations explored and operated in adjacent lands. Accrete’s first exploration well in the area will spud June/06. At Claresholm/Eastmont, the company has a natural gas play on 12 1/2 sections of land. Production is currently ~800 boe/d with 1,100 in current productive capacity which the company expects to ramp up to into summer/06. The potential is for 2 Bcf/well from the Bow Island, Glauc, and Sunburst target zones to a depth of 2,200 metres. In addition GZ has negotiated three farm-in deals with gross land earnings potential of 32 sections in this area. 6 of 11 wells in the area to date have been successes, setting up an additional 10 locations, with GZ planning a number of wells in the area in 2006. The area has sufficient capacity with a 28 mmcf/d metering station at the pipeline and a 10 mmcf/d GZ processing facility which is modular and can be upgraded if successes warrant. Accrete has 3D seismic coverage over most of their lands in the area and could grow this area materially if they are successful with land sales and farm-in deals With their Devon area Accrete has high impact potential (upside 500 – 800 boe/d net). The project requires a 2 mile pipeline approval but sour gas licensing and land owner issues will continue to plague this play. We do not anticipate any near term achievements in this area. Recent Operational & Financial Results: Q1/06 production averaged 2,224 boe/d exceeding our 2,166 boe/d expectation. Cash flow for Q1/06 was $0.35/share which exceeded our expectation of $0.32/share. Capital spending for 2005 was $49.3M in 2005. Accrete divested their Boltan lands (8 sections) and production (~110 boe/d) for $9.55M (~ $87k/boe/d net of land). Production is currently 2,400 boe/d with 600 to 800 boe/d behind pipe. In June/05 GZ completed a PP financing where 2M common shares were issued at $7.25/share for proceeds of $14.5M . Our 12 month stock price target of $13.00 is based on the 2006 cash flow estimate of $1.82 multiplied by the Proven RLI of 7.2 yrs. We expect that a shareholder maximization process will occur within the next year as Accrete’s tax horizon approaches and the true value of Harmattan in demonstrated to potential buyers. An Explore-co may be spun off with some unexplored acreage and modest production. Balance of Evidence Growth Drivers Limits to Growth The company is operating in areas that have been Access to service rigs, drilling rigs and skilled pipe successful for the management team in the past. lining crews is tight in the WCSB and may lead to Established dominance in the core area of delays in drilling, completions and well tie-in’s. Harmattan. Backlogs at the various regulatory agencies may lead Maximization process may occur late in 2006.