TORC Oil & Gas Ltd.
Geared up for success
Initiating Coverage: BUY recommendation and C$3.00 target price
We are initiating coverage on TORC with a BUY rating and C$3.00 target price. Our
valuation is NAV based, and maps to a 2014E EV/DACF of 8.0x. In TORC, investors get
a low risk asset to grow reserves and production (the Cardium), a potential ‘home run’
asset that provides significant upside potential (Monarch), and a clean balance sheet. As
a result, we rate TOG as one of our favourite picks in the Junior E&P space.
Why we think this stock will outperform:
Cardium to drive growth: TORC only recently moved from exploration to
development drilling in the Cardium. In our view this move will lead to an
increase in per-well rates, and a bump in production in the back half of 2013.
Monarch improvements. We believe TOG’s 150+ net section position at
Monarch offers considerable upside potential, and in our view is not priced into
the stock. With recent well rates showing significant improvements, we believe
the move to an economic development program at Monarch will soon be within
sight.
Top Tier Management: TOG’s management team has a history of success, most
notably with Bakken vehicle Tristar. In addition, officers and directors hold
over 12% of the basic shares outstanding (and over 20% FD), so its interests
are very much aligned with other shareholders.
Attractive entry point. In sympathy with several small cap, oil-weighted
Canadian producers, TOG’s share price has been under pressure over the last
6 months, despite management executing on its business plan following the
reverse takeover of Vero. We believe this is reflective of a ‘throw the baby out with the bathwater’ mentality
playing out in the junior energy space, and in our view has created an excellent entry point into TOG.
All at a reasonable valuation. TOG currently trades at a slight discount on an
NAV multiple (0.8x P/NAV vs. peers at 1.0x), and at a slight premium on cash
flow (5.2x 2013E EV/DACF vs. peers at 4.6x). In our view, TOG should trade at
a premium to the group due to its grade A management team, strong financial
position (no debt as of Q1/13), and the upside potential of Monarch.
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