Bankers Petroleum Ltd. (BNK $2.83)

Sector Underperform

Target 12 MO $2.50

2013 Capital Budget

  • Bankers Petroleum announced a 2013 capital budget of $247 MM, slightly higher than our estimate of $235 MM due to additional spending on facilities and infrastructure. The 2013 capital budget is ~15% higher than the company’s forecast 2012 spending of $215 MM. The company is now guiding to production growth of between 10% and 15% (~16.5 MB/d to ~17.2 MB/d) for 2013, with our FY13 production estimate being at the lower end of this range (16.7 MB/d). It is important to note that the consensus estimate prior to this announcement was 17.7 MB/d, which is above the upper limit of this range. We have made no material changes to our production or cash flow estimates.
  • The 2013 capital budget is slightly above our current cash flow estimate, with our estimate of net debt at the end of 2013 being ~$10 MM. The company had ~$99 MM drawn against its credit lines of $131 MM at the end of the third quarter, with $48.2 MM of the outstanding amount currently scheduled to be repaid in October 2013. Management believes that the company will be able to renegotiate its bank facility, which would provide extended repayment terms and additional credit capacity. In addition, Bankers has $16.6 MM in deposits, which were paid to the Albanian court relating to several legal cases, with recoverability of this amount dependent on the outcome of these cases. Management believes that these should be resolved by Q1/13 thus providing additional financial flexibility.
  • The company announced that it has contracted Weatherford International for technical overview of production optimization and operational practices. The cost of this contract was not disclosed, however, we do not believe this to be a material expense compared to the company’s level of spending. The first step of the project will be focused on production optimization recommendations, and will be available for implementation in Q1/2013.
  • Bankers has shown improved production momentum over the last few months and, as a result, we believe the 2013 production guidance is conservative compared to guidance in prior years. However, we believe that based on the performance of horizontal wells to date, there is a risk of well recoveries being lower in the upcoming reserve report. As such, the company could either recognize lower reserves per well or increase the number of wells that need to be drilled to recover the same total P+P reserves. In our net asset value we have assumed the same total P+P reserves (256 MMB), however, we estimate additional wells will be needed to develop the resource. On page two we have provided a summary table detailing our assumptions. We have made no changes to our assumptions, however, it is important to highlight the difference between our assumptions and those reflected in the December 31, 2011 reserve report. We do not believe the 2012 reserve report will reflect the full impact of additional capital, and over the next few years if no improvements are made in recoveries, we estimate the company will need to drill ~1,800 wells to recover this resource.

Given the risk of a reduction on per well recoveries which could result in a significant increase to future development capital, we continue to recommend Bankers as a Sector Underperform, with an unchanged 12-month target price of $2.50 per share, which is based on a slight discount to our net asset value. (