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Bankers Petroleum

Jamie Somerville Danny Yick, P. Eng.,CFA (Associate)
Recommendation: BUY Unchanged
Risk: HIGH
12-Month Target Price:C$6.00 Unchanged
12-Month Total Return: 110.5%
Neutral Reserves Update; Valuation and Growth Remain Attractive
Yesterday, prior to market open, Bankers Petroleum Ltd. (BNK-T) announced its year-end 2012 reserves for its Albanian heavy oil operations, with an update on recent production levels.
MIXED. Overall Neutral.
2P reserves decreased 16% year over year, which is slightly more than the 11% decline we were expecting. As expected, this breaks a six-year trend of year-over-year reserves growth (Exhibit 1).
However, management notes that “additional drilling capital and corresponding reserves could have been added to the development plan in lower recovery areas and zones in the field”, but that “the company elected to defer these plans until further evaluation drilling is conducted in these areas.”We anticipate that after two challeng ing years when results did not meetexpectations, Bankers should be able to return to growing reserves atreasonably attractive F&D costs in 2013 and beyond.
Post-tax PV10 estimates for 2P reserves declined only 6% (less than the 16%decline in reserves) as reduced reserves
were likely offset by significantly improved differentials, and the shifting of the discount date by a year. However, without a lowered Brent oil pricing assumption used by RPS (reserves engineers) compared with the prior year, PV10 estimates would have been up slightly year over year, in part because reserve engineers have recognized improved realized pricing relative to Brent.
Total future development costs increased 33% year over year to $2.4 billion (2P case), due to an increase in the number
of horizontal wells required (1,085 from 910 previously). Recoveries assumed per horizontal well have decreased
from 220 mbbl to ~156 mbbl, below the 190 mbbl we were previously assuming.
Drilling economics still appear highly attractive in th e current pricing environment. Bankers management estimates an IRR of 189% on individual wells (we estima te IRRs would be around 80% including associated facilities and remediation spending in the calculation).
Long-term differentials showing further potential for improvement:
On its conference call, management stated that it has concluded a first long-term sales contract with pricing at 83% of Brent in 2014-2015 and 84% from 2016 onwards. This compares with the company’s unchanged guidance for 80% in 2013. We view the contract as positive indication of long-term pricing potential, and have increased our long-term (from 2014)assumption to 80% (from 76%) as a result.
Credit Capacity to Increase?
A 20% year-over-year decrease in 1P reserves appears potentially concerning at
first glance (because proved reserves normally play at least a partial role in determining reserve based lending
capacities). However, we note the 1P post-tax PV10 of $947 million is up 238% relative to the equivalent number in the year-end 2008 reserves report (upon which the most recent credit facility caacity was based). Management continues discussions with its lenders for an increase to its $110 million credit facility, and expects to announce a finalized agreement by late March. We do not view Bankers as needing additional capital, but suspect that the market has some concerns and that increased debt capa city could lead to share price appreciation as a result.
Contingent Resources to be Valued:
Bankers expects to publish a new resource report in March, including valuations for contingent resources. Following a 32% decrease in original-oil-in-place (OOIP) estimates caused by a decrease in estimates for n on-core areas where thermal stimulation remains to be tested, we expect a reduction in contin gent resources (from 1 billion barrels estimated in February 2012 for thermal development). However, we anticipate that the new resource estimates could be for significantly higher quality resources (using multiple secondary and tertiary recovery techniques). We have reduced our upside resource estimates, but have increased our valuation of upside potential to ~$2.50/bbl (from ~$2.00/bbl)
Production Update:
Production in Q1/13 to-date of 16.8 mbbl/d is up 4% from Q4/12 levels and shows production trending slightly above our prior expectations in the short term.
Bankers is trading at the lowest multiple of Base NAVPS in our coverage of International
E&Ps (67% discount to the average for others in the group) and is at a 13% discount on Fully-risked NAVPS. It is also at a discounton 2013E EV/DACF Justification of Target Price
Our unchanged C$6.00 target is based on a combination of Base and Fully-risked NAVPS. The unchanged combination of 1.0x Base NAVPS and 0.70x Upside to Base NAVPS is relatively average within our coverage of International E&Ps. We currently use a range of 0.35-0.95x in terms of our multiples of Upside to Base NAVPS.
Key Risks to Target Price
Key risks associated with our target price include business risks of the company and industry, including but not limited to: loss of key employees; drilling success; volatile commodity prices; operating costs; capital cost overruns; product supply and demand; financing/access to capital; government regulations; legislation; royalties; taxes; exchange rates; interest rates; and environmental and weather concerns.
The key near-term risks specific to Bankers are:
Downside risk in a lower heavy oil price environment (we believe that under $60/bbl, a significant proportion of undeveloped reserves will become uneconomic).
Availability of processing and export infrastructure, including delays in developing infrastructure, creates
considerable risks and could delay production growth.
Higher-than-average geo-political risk.
Investment Conclusion
Bankers’ year-end reserves update was roughly in line with our expectations. Increasing our realized price assumptions slightly higher due to indications of further improvement in differentials has increased our NAVPS estimates slightly, but not enough to warrant adjusting our C$6.00 target price.
Bankers is trading at a discount to other International E&Ps under coverage on all key metrics, and at 0.43x Base NAVPS. We believe that a valuation of up to 0.65x Base NAVPS will leave room for a potential acquirer to offer a premium to market valuation and get a small portion of 2P reserves (and all of the company’s longer-term upside potential) for free. Although operational execution in heavy oil redevelopment in Albania offers challenges, we nonetheless believe that the over 5 billion barrels of original oil in place (combined with growing production) offers long-term growth potential that will be attractive to larger companies. In the absence of a take-out, Bankers appears to be taking the necessary steps to ensure the resource can be developed in a reasonably timely and cost-efficient manner.
Near-term catalysts include year-end financials (expected in mid-March), a new resource report (March), a credit facility review (late March or April), and regular operations updates (next update likely in early April).
We continue to believe that Bankers is likely to meet or beat the upper end of its production guidance for 2013
to average 10-15% growth (implying production of 16.4 mbbl/d to 17.1 mbbl/d).