Here's their report from yesterday. I really like their upside scenario. GLTA
Donnycreek Energy Inc.
Shares O/S (MM): 44.7
Price Target: 3.50
Implied All-In Return: 26%
Market Cap (MM): 124
Strategic Ownership: Treherne Resources 12.28% (private-company, controlled by Mr.
Priced at market close January 30, 2013 ET.
Donnycreek provided an operational update that highlighted a farm-in deal that
extends its exploration thrust southward.
• Steppin' Out. We believe the farm-in provides Donnycreek with low-cost
exploration of the south central portion of its 16.75 section (50% w.i.) Kakwa
block. As shown in exhibit 2, the farm-in location represents a step-out from
the company's existing 5 gross well development, which targets the Middle
Montney formation. In our view, positive results from the farm-in well,
especially if drilled into the Upper Montney, would further derisk the
company's unbooked 64 net well inventory.
• Condensate Yield. The company's first Kakwa Montney well (13-17) achieved
a condensate yield of 150 bbl/mmcf in January after producing at 200 bbl/mmcf
over its first 7 days on production in December. Though the 13-17 well is
tracking above our type curve assumptions (IP-30 of 750 boe/d with a 75
bbl/mmcf), long-term condensate productivity remains key to the well
economics, which are provided in exhibit 3 for reference, and our risked
valuation of $1.71/share for Kakwa.
• Activity Update. Operationally, the Kakwa drilling program is proceeding
slightly ahead of our anticipated pace with the third well on-track to be
completed in March. Due to the high liquids rates encountered thus far, we
expect on-time to remain somewhat choppy until the construction of 12-15
mmcf/d of processing capacity around mid-year. The move to knock out
condensate at the wellhead and truck to sales should alleviate some the current
downstream processing constraints.
• Valuation. At current levels, Donnycreek is trading at a 2013E EV/DACF
multiple of 13.5x (vs peers at 7.9x) and at a P/NAV of 1.8x (vs. peers at 1.2x)
at RBC's price deck. As shown in exhibit 3, Donnycreek currently offers the
highest Montney leverage on a Net Acres/EV basis.
• Recommendation. We maintain our Outperform, Speculative Risk rating and
12-month price target of $3.50 per share. Our price target is driven by our base
case expectations of profitable early-stage growth from Kakwa development, a
debt-free balance sheet, and the optionality from Donnycreek’s prospective
Montney land position.
Base Case: $3.50
Our base case and current $3.50 price target are based on Donnycreek’s profitable early-stage growth from its 64 net well Kakwa development with an assumed condensate yield of 75 bbl/mmcf, a debt-free balance sheet, and the exploration optionality from its over-sized , 160 net section Montney position.
Upside Scenario: $7.50
Our upside valuation of $7.50 reflects type curve outperformance with condensate yields consistently above 100 bbl/mmcf, successful derisking of the Upper Montney zone at Kakwa, and positive exploration results at Wapiti, which could lead to consolidation in the emerging liquids-rich Montney fairway.
Downside Scenario: $1.25
Our downside valuation of $1.25 reflects inconsistent well results with condensate yields below 50 bbl/mmcf, cost-overruns or delays at Kakwa, and mixed exploration results at Wapiti, that in aggregate lower the company’s growth trajectory and create funding uncertainty.