LONE PINE RESOURCES INC LPR
October 17, 2011 - 4:31pm EST by
ithan912
2011 2012
Price: 7.14 EPS $0.36 $0.85
Shares Out. (in M): 85 P/E 19.8x 8.4x
Market Cap (in $M): 607 P/FCF 4.7x 3.1x
Net Debt (in $M): 283 EBIT 49 125
TEV ($): 890 TEV/EBIT 18.2x 7.1x

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Description

Investment Thesis

Lone Pine Resources ("LPR") is a gas & oil exploration company recently fully spun off from Forest Oil ("FST") on October 3rd.  The ratio was .6125:1 and 70mm shares were distributed to holders of FST, many of whom don't own FST for the LPR business.  Classic spinoff dynamics are underway and the stock has sold off severely to very attractive levels.  At $6/share and with volume traded since the spinoff equal to over 40% of distributed shares, now is the time to consider accumulating LPR with 80-120% upside to low/mid teens at peer valuations or risked NAV.  (Time of submission stock at $7.14, reducing upside approximately 20%).  Growth in natural gas & oil production, margin enhancement with higher oil mix, increased per well production and spinoff dynamics all catalysts.

Spinoff

FST spun LPR in a tax-free fashion on October 3rd its remaining 82% interest, or 70mm shares.  FST initially spun off 18% of its ownership, or 15mm shares, in an IPO in May, but regularly indicated its interest in spinning off its remaining interest after the 4 month lockup ending on September 30.  This no doubt kept potential investors cautious in accumulating shares until this divestment was complete.  I believe this is a gift - temporarily depressing the stock price with both foreshadowing language of the distribution and then the actual distribution occurring with non interested shareholders dumping without regard to price. We get to pick up very attractive onshore Canadian natural gas and oil assets on the cheap.  Can hedge with select peers like BIR, CLT, PEY in Canada if you wish.

Business

FST contributed two main assets, the Evi and Nikanassin resources, to LPR as well as two upside shale plays after a focused two year restructuring and assessment.  LPR has lease rights on over 800k acres across Western Canada and Quebec, with 70% mainly in Alberta & BC and 30% in Quebec.  As of 12/31/10, LPR had 108 Mmboe WI and 376Bcfe of proven reserves. Evi/Nikanassin will dominate drilling for next several years, with upside Utica and Liard Basin shale projects in 2013/2014 forward to enhance growth.  The company claims over 2500 drilling locations across proven and unproven reserves, with only 50-55 in the 2011 new drilling program, indicating large production growth potential.   75% of current production is gas with a move to 60-65% gas in next 2 years, as liquids growth from Evi accelerates.  Evi has 56 wells online now and over a 100 associated with proven undeveloped reserves.  The Nikanassin area is the focus for NG production for the foreseeable future as the company looks to improve frac density.  Here is a breakdown of its acreage location:

 

REGION

 

Evi

57,222

Nikannassin

128,800

Other Deep Basis/Wild River

38,000

Utica Shale - Quebec

240,320

Liard Basin - N.E. BC

53,000

Other

284,500

                         TOTAL

801,842

* as of June 2011

 

 

EVI - 7 mmcfe/day current production

- Evi Light Oil Play:  79 gross sections with 474 locations at 6 wells/section.  At WTI $80/bbl oil, Evi makes $60/bbl margin.  Approval up to 8 wells/section.

- 3400-3600 Bbls/d current production.

- Avg DCT is $2.4mm/well.

- 2011 Well program is for Peak IP of 305 Bbls/d, up 66% FROM 2010's 184 Bbls/d.  After 60 days, average is 183 Bbls/d vs 115 in 2010.

- Fracture stages per well in 2011 will be up 67% from 6 to 10.

- Over 7 year drilling inventory at 50 per year.

 

Deep Basin region - 77-78 mmcfe/day current production

Nikanassin Resource Play:  316 gross sections with 1,264 locations at 4 wells/section, currently producing 50-60 MMcfe/day.  Main focus of new drilling programs.   Avg IP is 7.0, DCT of $8.7mm and NPV10 @ $5 NYMEX is 9.0.  Avg 90 day rate is 3.2MMcf/d.

Wild River:  20-25 Mmcfe/day, with some recompletion potential.   

 

Plus:  Future option on natural gas through Liard Basin and Utica shale play

Utica - St. Lawrence lowlands area of Quebec, roughly 240k net acres.  Quebec continues to develop its drilling development royalty system. 

Liard Basin - 50 miles from the Muskwa shale.  Net 53k acres.  Adjacent to the Horn River Basin and very close to Spectra Gas Pipeline.  Conducting operations now.

Production growth in 2011 will be in the mid/high teens and I expect a higher growth rate in 2012 as increased per well production and # of wells enhances the topline, and further shift into liquids benefits margins.  Given this growth profile, the company should not be trading at half of risked NAV...

 

Balance sheet/Liquidity

- $283mm in net debt with a $425mm 5 year borrowing base.  LPR expects its FCF and facility will fund all capex needs for next few years.

- $222-233mm of development capex for 2011, 60% of which is focused on Evi oil as goal is to drill 42 net horizontal wells for Evi. 

- $120-130mm of CFFO this year, rising to $200mm+ next year if NG averages mid $4s

- No dividend expected for foreseeable future as all FCF goes towards developing its resource base.

 

Hedging

Management has shown a willingness to hedge production to lock in visibility and growth capital.  Current hedging program for 2011 & 2012:

 

 

2H 2011

2012

Crude Oil Swaps

 

 

Volume

2000 Bbl/d

2000 Bbl/d

Weighted Avg Price

US$100.29/Bbl

US$102.35/Bbl

Natural Gas Swaps

 

 

Volume

30000 MMBtu/d

25000 MMBtu/d

Weighted Avg Price

US$4.85/MMBtu

US$5.09/MMBtu

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 

 

Valuation

LPR is very undervalued to comps on EV/EBITDA basis.  It trades at a significant discount to both its NAV & Risked NAV.  Conensus estimates seem pretty reasonable based upon their hedging program and growth guidance.  Please see comps & NAV summary below:

 

 

10/17/11 Closing

 

 

 

 

LTM

EV/LTM

11E

11E EV/

12E

12E EV/

Company Name

Symbol

Price

   Shares

Mkt Cap

Net Debt

TEV

EBITDA

EBITDA

EBITDA

EBITDA

EBITDA

EBITDA

Progress Energy Resources

PRQ

                 13.65

    231.646

              3,161.97

      464.00

     3,625.97

       241.00

15.05

       223.00

16.26

        255.50

14.19

Celtic Exploration

CLT

        24.00

103.668

 2,488.03

       134.00

 2,622.03

        128.62

20.39

         150.00

17.48

      243.00

10.79

Peyto Exploration & Dev

PEY

 20.49

133.061

   2,726.42

      459.00

     3,185.42

        235.00

13.55

 324.00

9.83

      369.00

8.63

NuVista Energy

NVA

                  6.38

99.513

    634.89

       309.00

      943.89

        164.50

5.74

 193.00

4.89

      172.00

5.49

Crew Energy

CR

                10.64

119.595

   1,272.49

       106.54

     1,379.03

         106.11

13.00

        191.50

7.20

346.50

3.98

Birchcliff Energy

BIR

                   13.71

126.672

   1,736.67

      396.00

    2,132.67

        126.77

16.82

        143.50

14.86

      155.50

13.71

 

 

MEDIAN

 

    2,112.35

 

     2,377.35

 

         14.30

 

               12.35

 

                 9.71

 

 

 

 

 

 

 

 

 

 

 

 

 

Lone Pine

LPR

                     7.10

85

      603.50

       283.00

        886.50

        117.00

7.58

        136.50

6.49

      219.00

4.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 16.50

 

    21.69

 

 

 

 

 

 

 

 

 

Upside

132.4%

 

205.5%

 

  

NAV Summary, @ 11% discount rate

 

 

 

 

 

 

 

 

Resource

 

Risked

Valuation

 

 

 

 

Asset

 

(Bcfe)

Risk Factor

Resource

$mm

$/share

$/mcfe

 

 

Deep Basin/Wild River

127

74%

94

$140.00

    $1.65

     $1.49

(@ $5 NG)

Nikanassin

 

4197

69%

2896

 $960.00

   $11.29

     $0.33

(@ $5 NG)

Evi

 

197

68%

134

 $780.00

    $9.18

     $5.82

(@ $80 WTI oil)

Utica

 

4138

17%

703

 $40.00

    $0.47

     $0.06

(@ $5 NG)

Other

 

76

48%

36

     $40.00

    $0.47

     $1.10

(@ $5 NG)

 

TOTAL

8735

 

3864

  $1,960.00

   $23.06

     $8.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Debt

$283

 

 

 

 

 

 

 

 

NAV

 $1,677.00

$19.73

 

 

 

 

 

In addition to the spinoff pressure, possible reasons for the undervaluation is the lack of public operating history as a separate entity, no dividend yet, and current high 96% of risked reserves in natural gas, and 70% mix in natural gas.  Natural gas staying at $3.70 NYMEX would cause reduction in earnings in 2013 forward assuming no hedging.

Catalysts

-    Reduced selling pressure from FST holders

-     Strong margin boost from higher liquid %s the next 18 months, driving EPS and valuation higher

-     Continued well and production growth in Nikanassin and Evi for next several years

Risks

-     Natural gas and oil prices falling

-     Quebec regulations delaying or disallowing Utica shale operations


 

Catalyst

 
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