CG on STP - ON THE ROAD WITH MANAGEMENT
ON THE ROAD WITH MANAGEMENT
We marketed STP last week, and the two key takeaways we took from
the trip were: 1) management remains confident in McKay ramping up
towards capacity in 12-18 months from 10/12, when first oil occurred;
2) liner failures are common in SAGD operations (recall a liner failure
contributed to the weak January production at McKay). Please see our
notes starting on page 5.
Wave of negativity presents buying opportunity: In addition to general
market malaise, particularly towards heavy oil and oil sands due to wide
heavy differentials, the ramp-up being slower than what the market was
hoping for has led for the stock to fall 13% since FQ2/13 results on
2/7/13, underperforming peers by ~5%. We believe there is potential for
the scepticism to be removed provided that STP announces a positive
production ramp-up over the next 12-15 months. However, we reiterate
our expectation that the ramp-up process will not be linear and will
involve an iteration process to fine-tune and fix bugs. As well, once STP
starts reporting USGC sales on its financial statements, we believe the
pricing advantage of its rail deal to the USGC will become more
apparent to the market.
Current valuation should attract attention: We estimate that the market
is currently pricing in for McKay Phase 1 to only reach 60% of capacity.
Alternatively, the current price is equal to a NAVPS that incorporates
just Senlac value and 70% of McKay value (NPV10). And finally, using
our NPV10 for Senlac + McKay Phase 1 construction cost of $468mm +
McKay resource (ex-Phase 1) at half the price STP paid in 2010 to
consolidate its McKay interest, we arrive at a base case value of
~$1.00/share, or 5% below last close, further indicating to us how
attractive the current share price levels are (Figure 1).
We reiterate our $2.00 target and BUY rating: We continue to like STP
for its potential re-rating as an oil sands producer and expected pricing
advantage from its marketing deal to rail McKay production to the
USGC. Our target is based on 1x our estimated risked NAV.
More..........11 pages
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