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
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.