Their upside scenario target is $18.00. GLTA

August 27, 2014

DeeThree Exploration Ltd.

Initiation: An attractively priced growth stock

Our view: We initiate coverage of DeeThree Exploration with an

Outperform rating and a one-year price target of $15.00 per share.

Anchored by two large oil discoveries, DeeThree trades at a discounted

cash flow multiple to peers despite superior per-share growth metrics,

a healthy balance sheet, and a management team with foresight in new


Key points:

We think DeeThree's material unbooked resource exposure and solid

execution should drive 20–30% NAV growth into 2016, leading to future

share price appreciation.

Superior per-share growth. DeeThree is a full-cycle exploration and

production company with strong organic growth ahead through

development of two large oil discoveries. We believe the company is

well positioned to grow to 15,000 boe/d (80% liquids) in 2015 and we

peg debt-adjusted production per share growth at 22% vs. 7% for our

oil-weighted peer group.

Material unbooked resource exposure. Led by Martin Cheyne,

management's early-mover advantage and exploration expertise in the

conventional part of the Alberta Bakken and under-appreciated Belly

River play provide 123 million boe of unbooked resource exposure

($10.48/share unrisked). Total resource exposure equals roughly 3.0x

DeeThree's 39 million boe YE13 booked reserves, which underpins our

$9.23/share base NAV. On a per-share basis, DeeThree's 2P reserves

+ unbooked resource potential ranks second-highest in our coverage


Visible 20–30% NAV growth with robust economics. We believe the

company's 400+ future drilling locations can support growth to 20,000

boe/d by 2017 without additional exploration success and a constant

$35,000 flowing boe/d corporate capital efficiency. At RBC's long-term

$95/bbl Canadian light oil price outlook, we calculate supply costs (15%

pre-tax IRR) of $57/bbl for the larger Belly River and $62/bbl for the

Alberta Bakken, which in our view strengthens the case for acceleration.

Our type curve work shows repeatable productivity gains in both plays

primarily via extended reach laterals.

Balance sheet outlook: healthy. We see the Alberta Bakken

transitioning to a FCF generator in 2015 with the lion's share of future

growth coming from stacked Belly River development. Assuming a

$300 million capital program in 2015, we project net-debt-trailingcash-

flow ratio of 0.7x vs. 1.7x for our oil-weighted peers. We think

DeeThree's balance sheet can comfortably keep pace with its highgrowth


Compelling valuation relative to growth profile and resource leverage.

At current levels, DeeThree trades at a 4.7x 2015E EV/DACF multiple vs

oil-weighted peers at 6.2x despite a stronger growth outlook and an inline

1.2x P/NAV multiple with considerably higher resource exposure.