CG on CLL - MIXED Q1/13 RESULTS
MIXED Q1/13 RESULTS
CLL’s reported Q1/13 earnings last night. While production of 12,406 bbl/d was in line with our 12,508 bbl/ forecast, cash flow of $0.02 exceeded our ($0.04) forecast. This was due to higher realized pricing ($38.31/bbl vs. our $30.24/bbl) as the company's rail by bitumen climbed to 55% of total sales. We had pointed out in past research that realized pricing is the key unknown in our estimates given the lack of clarity around CLL's rail arrangement, and we indicated in our preview piece, “Q1/13 earnings playbook” on 4/22/13, that a materially higher than forecasted realized price was a possible positive for the stock.
However, offsetting is CLL's bank line covenants are starting to further constrict financial flexibility. The company had $95mm less outstanding letters of credit totaling $2.3mm of available credit line; however, covenants restrict the maximum available credit line at the end of Q1/13 to $82.7mm (net of existing letters of credit). See pg. 2 for more details. The company did indicate that it is able to incur first lien debt of up to $170mm (inclusive of debt under the facility), subject to obtaining the required consents from the lenders, but we don't believe the market (especially equity holders) would be too welcoming of more debt.
We maintain our SELL rating and $0.00 price target. The company’s financial flexibility continues to be severely limited, making future maintenance capex difficult to meet (Figure 1). We continue to see value in CLL’s assets, but in order to overcome its heavy debt and fund the approved 24 mbbl/d Great Divide expansion, we believe CLL needs third-party financing by way of JV or takeout. However, in our view the chance of CLL receiving a good price continues to be challenging with volatile heavy differentials and Investment Canada's rules around foreign ownership and takeout. Furthermore, any type of corporate restructuring has a high chance of equity holders not salvaging much, if any, value.
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