Small and Mid Cap Oil & Gas Exploration & Production
Reduce NAVs On Lower Commodity Prices
22 pages, 12 exhibits
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excerpt:
We reduce our NAV-derived targets for the bulk of our small cap E&P
group on a lower commodity price outlook. We are reducing our NAV-
derived price targets for our small-cap E&P group by a median of 5%,
reflecting lower near and intermediate term commodity price outlook. We
lower our H2’10 oil and gas price assumptions to $75.50 per barrel and
$4.71 per MMBtu (from $80/$4.75). In 2011 and 2012, our new price
assumptions are $72.50/$5.25 (from $80/$6) and $80/$6 (from $80/$6.50),
respectively. Our long term commodity price outlook remains $80/$6.50.
Lower 2010-2012 EPS Estimates. As a result of the changes to our
commodity price assumptions we also lower our 2010-2012 EPS estimates.
For 2010 we lower our EPS projections by a median of 6%, and for 2011
and 2012, we lower of EPS forecasts by 30% and 23%, respectively.
Funding Gap Persists Into 2011. We now expect the Credit Suisse small-
cap E&P group to spend 195% of cash flow to drive 7% median production
growth in 2010. While we project 27% production growth in 2011 as a result
of the resurgence in spending in 2010, we anticipate the group will still
spend 146% of cash flow next year. While small-cap E&Ps typically
outspend cash flow in the early years to drive production, asset and cash
flow growth, the outperform rated names in our universe are positioned to
fund growth with cash flow in high returning project areas.
We argue ROSE and SFY are underappreciated liquids-focused
transition stories. ROSE remains one of the top picks in the Credit Suisse
small-cap E&P universe, given the company’s deep project inventory in the
Eagle Ford shale, management’s track record of value creation, and strong
balance sheet. ROSE was an early entrant to the Eagle Ford, having
amassed roughly 65,000 net acres in the play (77% in the condensate/NGL
window). We argue with the stock trading at a 29% discount to our ‘PD Plus’
NAV estimate that does not assign any value to the Alberta Basin Bakken
(294,000 acres), investors are also getting an inexpensive oil option along
with strong growth out of the Eagle Ford. Turning to SFY; trading under 4x
our 2011 EBITDA estimate, we think shares represent one of the more
attractive value opportunities in small-cap E&P. SFY had roughly 14 mboe/d
of oil/NGL production in Q2’10, providing ample cash flow to reinvest in its
deep project inventories in the Eagle Ford shale (75,000 net acres) and the
Olmos sand (40,000 net acres). |
