June 6th, 2001
David Heden
Financial Analyst, Oil & Gas
dheden@k2.ca
OSPREY ENERGY LTD. OEL- CDNX
Symbol: OEL - CDNX
Recent Price: $1.32
52 Week High: $2.69
52 Week Low: $0.45
Shares Outstanding:
Basic: 8,674,200
fully diluted: 13,700,000
Market Cap: 18M
Float: 8.8M
Highlights
· Rapid cash flow acceleration driven by both increased production and strong commodity prices. Production increases from 920 boe/d exiting FY 2001 to 2950 boe/d exiting FY 2002 or 221%.
· Excellent finding & development costs continue to create shareholder value. Company purchased reserves at a deep discount to current market prices. Now plans to capitalize on high commodity prices.
· Low valuation and market multiple. Trades at a mere 1.65 times FY2002 cash flow and only 2.1 times on a EV/EBITDA basis.
· Strong Balance sheet to fuel further development. Osprey will likely exit FY 2002 with low debt, a reasonable working capital cushion, and 1.23 million in cash flow a month.
· Operating success and development of core operation areas. Exiting next fiscal year, Osprey will have a core area to focus on in Louisiana. Alberta and Nova Scotia present significant further upside to projected mmcf/d production.
The information contained in this report has been compiled by David Heden from sources believed by him to be reliable, but no representations or warranty, express or implied, is made by David Heden or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute David Heden’s judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. David Heden may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of customers.
PRODUCTION PROFILE
PROPERTY FY 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 FY2002
Cotton Valley Bbls/d 800 1100 1350 1700 1700 1700
Mmcf/d - 1 3.7 3.7 3.7 3.7
Bayou Choctaw Bbls/d 33 - 250 250 250 250
Mmcf/d - - 0.4 0.4 0.4 0.4
Livingston Bbls/d 30 30 70 250 250 250
Mmcf/d - - - - - -
Gulf Jenner Bbls/d 18 18 18 18 18 18
Mmcf/d - -
Tiverton Jenner Boe/d 32 32 32 32 32 32
Elk Island Boe/d 7.5 7.5 7.5 7.5 7.5 7.5
Total boe/d 920 1355 2493 2950 2950 2950
Notes:
Fiscal years end June 30
Production net of working interest
FY 2001 and 2002 represent exit production rates
Quarterly production represents average over period
Numbers may not add due to rounding
Boe- barrel of oil equivalent (6:1)
MAJOR PRODUCING PROPERTIES
Cotton Valley
Osprey has a 75% working interest before payout and 50% after payout. The area is comprised of over 25,000 acres. There are currently 12 oil and gas wells as well as a salt water disposal well. All were drilled in 1998. Production is estimated to reach as high as 2000 blds/d and 5 mmcf/d. Proved reserves are estimated to be in excess of 3,000,000 BO and 13 BCF of gas. The property was acquired in January 2000, production infrastructure included, during a period of depressed market prices.
Bayou Choctaw
Osprey has a 60% working interest in this 360 acre property. Total proved and probable reserves are estimated at 2,000,000 BO and 3 BCF of gas. The property was shut down in the mid 90’s after 60 years of production as oil and gas prices hit 30 years lows. Recent seismic data has discovered several new oil and gas zones. There is anticipated production of 250 Boe/d and 400 mcf/d once the appropriate infrastructure is completed shortly.
Livingston
Osprey owns a 30% working interest in the 4200 acre property. Proven reserves are 500,000 BO and probable are 1,000,000 BO. Currently, the wells, which were drilled in 1998, are producing 60-80 boe/d and production is anticipated to increase to 250-300 boe/d during next fiscal year.
FINANCIAL RESULTS
Q1 2002 Q2 2002 Q3 2002 Q4 2002 FY 2002
Production (Boe/d) 1,355 2,493 2,950 2,950 2,437
Average ($/boe/d) 37.50 37.50 37.50 37.50 37.50
Average ($/mcf/d) 6.36 6.36 6.36 6.36 6.36
Oil and Gas Revenue ($) 3,375,000 5,499,000 8,306,000 8,502,000 25,595,000
Royalty ($) 1,297,482 2,210,860 3,231,156 3,273,524 10,013,022
2,077,518 3,288,140 5,074,844 5,228,476 15,581,978
Gas weight 13% 31% 24% 24% 23%
Operation Ex. ($) 1,122,518 1,875,140 2,884,844 2,923,476 8,805,978
Operating cash flows ($) 1,416,000 2,299,000 3,631,000 3,677,000 11,024,000
Interest ($) 187,500 187,500 187,500 187,500 750,000
D,D&A ($) 40,000 40,000 40,000 40,000 160,000
Earnings before taxes ($) 1,188,500 2,071,500 3,403,500 3,449,500 10,114,000
Taxes ($) 525,000 525,000 525,000 525,000 2,100,000
Earnings ($) 663,500 1,546,500 2,8785,00 2,924,500 8,014,000
S/O basic 8,674,200 8,674,200 8,674,200 8,674,200 8,674,200
S/O fully diluted 13,700,000 13,700,000 13,700,000 13,700,000 13,700,000
EPS basic 0.08 0.18 .33 .34 .92
EPS f.d. .05 .11 .21 .21 .58
CFPS basic .16 .27 .42 .42 1.27
CFPS f.d. .10 .17 .27 .27 .80
LTD ($) 7,500,000 7,500,000 7,500,000 7,500,000 7,500,000
Net Working ($) Capital 500,000 500,000 1,000,000 2,000,000 6,500,000
Debt/CF 5.30 3.26 2.07 2.04 0.68
Notes:
Production represents average over period
Numbers assume no debt repayment during FY2002
13.5 million is the assumed capital budget during FY 2002
PROFITABILITY
Ticker Recent Price Bbls/d Mmcf/d CFPS P/CFPS EPS P/E
Osprey Energy OEL 1.32 2358 4.1 0.8 1.65 .58 2.28
Vermilion Resources VRM 11.00 16,700 79 2.79 3.40 .86 12.79
Thunder Energy THY 4.47 2,300 39 1.30 3.44 .43 10.40
Storm Energy SME 10.50 6,800 32 2.50 4.20 .72 14.58
Southward Energy SWN 8.45 1,100 60 1.91 4.42 .32 26.41
LEVERAGE AND RETURN
Enterprise Value EV/Ebitda Debt/CF EV/BOE/d
Osprey Energy $23 M 2.1 .67 8474.58
Vermilion Resources $743 M 3.7 .8 33,224
Thunder Energy $201 M 3.9 2 42,062
Storm Energy $337 M 3.9 1.6 52,675
Southward Energy $283 M 4.1 .8 95,579
OPERATING EFFICIENCY
Revenue/boe Royalty/boe Netbacks/boe DD&A/boe
Osprey Energy 44.50 10.96 21.56 3.55
Vermilion Resources 41.03 9.71 26.92 5.56
Thunder Energy 39.05 8.43 26.03 7.11
Storm Energy 46.32 13.6 28 6.78
Southward Energy 51.04 13.27 33.50 8.81
Notes:
All production numbers based on FY2002
Osprey FY 2002 ends June 30 2002, compared to the groups end of Dec 31, 2002
Enterprise values based on current prices and FY 2002 average debt levels
“Operating Efficiency” figures based on 12 month period ending Dec 31, 2000
VALUATION
Osprey acquired much of its production infrastructure strategically at deep discounts to current market prices. Fiscal year 2002 presents the challenge of delivering on the enormous potential of its reserves. Additional capital should facilitate its estimated production projections and deliver strong cash flows. Clearly, Osprey trades at a deep discount to its peers. Osprey trades at a mere 1.65 times FY2002 cash flow compared to an average of 3.87 times for the group. It is also quite attractive on an earnings basis, trading at a 2.38 P/E multiple, as well as on a leveraged return basis commanding only 2.1 times EV/Ebitda.
A catalyst for multiple expansions exists not only in operational success but with increased liquidity and visibility. Osprey’s market capitalization and total production is relatively small in comparison to its peers. FY 2002 will likely bring the increased visibility needed as Osprey’s production increases over 200% and cash flows triple . Liquidity has also been improving recently. Osprey is also well on its way to raising CND 7.5 million. This should more than facilitate the needed cap-x requirement to bring further production online.
The company will likely exit fiscal year 2002 with core operations in Louisiana producing over 3000 boe/d, a strong balance sheet, and significant upside potential with new projects in Nova Scotia and Alberta. The project in Louisiana has already surpassed initial production and cash flow estimates. Further development in Louisiana will be financed through cash flow from production in Louisiana and external financings.
It is worth noting that wells in trends similar to Osprey’s new project in Alberta are producing 30 mmcf/d. Initial 3-D seismic data is very positive and estimated field production is as high as 73.4mmcf/d (net of working interest). This would more than quadruple Osprey’s projected year-end production and cash flow.
Nova Scotia also represents significant potential for Osprey, where the company owns a 15% working interest in 220,000 acres of land, with an option to increase to a 25% working interest. The Company is conducting a seismic program to verify targets identified on an earlier seismic shoot. Within the next fiscal year beginning July 1st, 2001 Osprey anticipates a drilling program based on positive results. Several senior producers have had recent success in the area and are also conducting comprehensive seismic programs this summer.
Industry consolidation remains a key factor in valuing Osprey. Senior and Intermediate producers continue to acquire junior and emerging companies. Average takeout prices in the oil patch have approximated 3.8 times cash flow and $35,000 boe/d. This puts an implied value of $3.04 and $6.26 respectively on Osprey. Given Osprey’s upside potential and production it appears Osprey is undervalued relative to the market and its anticipated performance. A more reasonable valuation may be obtained once production estimates in Louisiana are realized in late 2001. |
