CG on STP
STILL TOO EARLY TO TELL
We are maintaining our BUY rating and FOCUS List status post STP’s
FQ2/13 update and conference call. We believe the stock falling 6% on
2/8/13 is an overreaction to the weak January production at McKay. In
our view, it is still too early to determine the ultimate performance of the
project. With the stock pricing in for McKay to reach less than 65% of
capacity, we believe it is a good opportunity for investors. Our $2.00
target continues to be based on 1x our estimated risked NAV.
Is the ramp-up taking too long? STP is being cautious and slowly easing
the project into production (currently only injecting ~30% of steam
capacity) and making sure at least 50-60% of the horizontal length of the
well pairs have adequate temperature conformance and chamber
development before switching over to production. STP indicated one
reason for non-conformance is subtle reservoir heterogeneity. While
some investors may be concerned by such a comment, we actually find
comfort that management recognizes this and is slowly maneuvering
through it. It tells us that there is understanding of the reservoir. We
would be more concerned if the company was going full steam ahead
and ignoring what the data was suggesting (see Nexen/OPTI).
Outside of commodity prices, we believe the market automatically gets
concerned about STP’s ability to support its debt anytime there’s a blip
in McKay’s performance. This is a common concern, particularly for
investors who are familiar with Connacher and OPTI. While we believe
STP has likely learned from the mistakes of the aforementioned
companies (i.e., more delineation, building extra steam capacity, etc.),
the only way to remove the skepticism is through performance. To that
end, with Senlac covering 45-60% of STP’s annual debt payments and
G&A expenses, we estimate that McKay would need to ramp up to at
least 4,800 bbl/d (40% of capacity) to make up for the rest.
more...
research.canaccordgenuity.com
also:
Southern Pacific Resource* (STP : TSX : $1.13), Net Change: -0.07, % Change: -5.83%, Volume: 2,346,403
I like saying Natchez. Shares of Southern Pacific Resources were down after the company reported Q4/12 results. At the company’s McKay Thermal Project the company reported average January production of ~1,500 bbl/d, this was down from more that 1,600 bbl/d in the first week in January. The reason for the decline was downhole repairs on one of the newly converted SAGD well pairs. Those repairs are now finished and the well is now being steamed and will be placed back on production in the next couple weeks. In January, STP loaded the first rail cars of dilbit from STP-McKay for delivery to Natchez, Mississippi. Southern Pacific has completed three, one month contracts directly with major refineries in the U.S. Gulf Coast. These contracts, which have secured pricing through the end of March 2013, provide access to U.S. Gulf Coast based pricing for the company's dilbit and will substantially improve overall plant gate netbacks to approximately $45 per barrel. The company expects to ramp up the STP-McKay volumes through the remainder of this and the next fiscal year, with production expected to reach nominal plant capacity of 12,000 bbl/day in fiscal 2014. This production base, coupled with the new wells being added at STP-Senlac, should open up new opportunities for STP as the company utilizes its cash flow to finance continued growth. |
