ECA Marcellus Trust I (ECT)
Drilling Program on Track to be Completed in 2011; Maintain Buy
8 September 2011 ¦ 15 pages
citigroupgeo.com
Drilling Program Ahead of Schedule — At the end of 2Q11, 31 wells (14 PDP’s and
17 PUD’s) were online and producing, which was in-line with management projections.
Current expectations are for the drilling program to be complete in 2011. For instance,
to date, ECA has drilled 32 PUD wells in total. As a result of lateral lengths, these 32
PUD wells are equal to 41.2 net PUD wells to ECT. These equivalent PUD wells drilled
count towards the 52 equivalent PUD wells ECA has committed to drill. Though the
drilling program will be complete in ‘11, due mainly to pipeline capacity constraints, the
remaining drilled wells aren’t expected to be online and producing until mid 2012.
Projected Yield of 12.7% on 2012 Cash Flows — Based on our production profile
updates, we expect cash flow to unit holders as well as production volumes to peak in
2012. In addition, we estimate that the trust has the potential to raise distributions at
an average quarterly growth rate of 1.7% between 3Q11 and 4Q13. This equates to
projected yields of 9.2%, 12.7% and 11.3% for ’11, ’12 and ’13, respectively.
Near-Term Volatility Remains a Concern — Looking ahead, we expect unit prices
and distributions to unit holders to closely follow changes in natural gas prices and
production volumes. Moreover, in the near term, we believe that the combination of the
recent U.S. debt downgrade, the European sovereign debt crisis, and growing
concerns over slowing global economic growth should lead to further volatility and
possibly some notable pullbacks (i.e. increased aversion to risk in the broader market).
Maintain Buy/High Risk Rating — In the long term, we urge investors able to sustain
some volatility, to strategically add to/build positions. This suggests that cash flow
growth and potential price appreciation is supported mainly by: 1) strong development
drilling program, 2) cash flow stream protected by 3-year hedging program, and 3)
continued interest in yield-oriented Investments.
Raising Target Price — We are raising our 12-month target price by $1.50 to $34.00
per unit. Our target price assumes applying an 11.0x trailing P/DCF multiple to our |
