Kerm / Merit
Merit Energy Ltd. (TSE:MEL; $5.85)
I saw the release for the Q4 figs and was a bit concerned about a couple of the numbers. I got hold of a set of slides from Merit's New York road show, which helps flesh out the picture a bit. Let me bounce the story off you. (And yes, I do have a position).
Merit has 28.9 million fd shares (mgmt, employees etc. =10%). NAV on fd basis is $4.84. Production mix is 70/30 in favour of gas, with only 6% heavy oil. Average production was around 4,400 boe/d in '97, and is expected to be 8,600 boe/d in '98. The company projects '98 exit at 9,200 boe/d. CF was $0.52 in '97, and projected $1.10 in '98. They claim an 84% success rate on the '97 drilling program; I don't know what the breakdown between exploration and development was, but they claim to have replaced 11x production.
Areas include Ft. St. John in NE B.C., Alberta southeast of Calgary, East-Central Alberta on the Saskatchewan border, and southwest Saskatchewan. They've negotiated an alliance with Gulf for east central Alberta.
Now the part that bothers me. Debt was $26 million at YE '97, or a smidge over 2x CF. The 1998 capex budget is $92 million (of which $32 for drilling, $38 for acquisitions). Financing goes something like this:
Debt YE 1997 = $26
Capex '98 = $92
Subtotal = $118
LESS
CF '98 = $32
Divestures = $10
Facility Financing = $10
Suggests debt at YE '98 is $66 million, or 2x projected '98 CF.
I think the Rigel deal for 2,000 boe/d is the bulk of the acquisition budget.
Note that their CF ests. are based on AECO spot of $1.60/gj, NYMEX at $2.40/mmbtu avg., and WTI @ 18.50/bbl @ $0.72.
Rumour has it that there has been close involvement with some of the same people who got CNQ moving. In other words, the idea is that "management" has a track record.
Two years ago I might have pulled out all the stops to buy these shares -- it looks like an outstanding growth story. In the current environment, I'm not so sure. Are they being too aggressive? Looks like their pricing ests. might be a bit generous on the oil side, but they're very gassy, and the gas prices look OK. So pricing isn't too likely to undermine their CF assumptions. But they're looking for a big leap in production; if they don't make it, then debt won't be 2x any more. OTOH, they should be at something like 6,500 boe/d already with the acquisition.
Bottom line is whether $66 million is too much debt for this company in this environment. Any thoughts? |
