CG on STP - EYES ON THE LAST TWO WELL PAIRS
EYES ON THE LAST TWO WELL PAIRS
We are maintaining our BUY rating and $1.25 target after STP’s FQ3/13
earnings release and conference call. It is evident to us the market was
fixated with the McKay production volumes (1,023 boe/d average in
April and 1,250 boe/d average for the first week of May) given the ~13%
drop in share price post earnings. We continue to believe that the focus
should be on the status of the well pairs, and we were encouraged that
two more were converted to full SAGD (for a total of seven), as
production ramp-up will not occur until all are in full SAGD model. For
the next update (May production), we are not expecting a material
production increase (although that would be nice), but we will be
focused on the last two well pairs stubbornly in circulation.
The next couple updates are monumentally important: We have
communicated in past research that although the production ramp-up
will be an iteration process, we will be compelled to revisit our
expectations if there is no supporting data in calendar Q2/13 (i.e., no
strong ramp-up trajectory or all wells are still not in full SAGD mode) to
provide confidence toward the project’s ability to produce near capacity.
The end of June 2013 is the halfway mark of management’s 18-month
ramp-up guidance (started in Oct. 2012). If all well pairs are fully
converted to full SAGD mode by then (and stay that way), we would see
that as a positive for the story.
Question of financial flexibility moving to the forefront: We estimate that
McKay needs to reach ~5,500 bbl/d or ~45% of capacity in order for STP
to break even corporately (Figure 1). In the ultra bear case scenario,
where McKay is unable to ramp up beyond the current 1,250 bbl/d
(~10% of capacity), even if full steam is injected, STP would be
financially squeezed by late this year. Therefore, if McKay is unable to
ramp up beyond the break-even level (but >1,250 bbl/d), STP will need
to have in place options to improve financial flexibility by late Q4/13 or
early Q1/14. The $25mm LOC increase helps, but McKay performance is
still the most important component at this point.
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