investment re sea rch charger energy corp. …€¦ · charger energy corp. recommendation: buy...
TRANSCRIPT
Jeffrey J. Fiell, CFA Vice President – Research Analyst [email protected] (403) 536-5457
Please see disclosures on the last page June 12, 2012
INV
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R E S E A R C H I N V E S T M E N T
CHARGER ENERGY CORP. RECOMMENDATION: BUY
CHX-TSXV $0.61 TARGET PRICE: $1.503.50
INITIATING COVERAGE – A NEW JUNIOR E&P WITH MAJOR UPSIDE
Charger Energy Corp. was created on
March 7, 2012 by way of a four-way plan
of arrangement.
Current production is 3,500 boed and we
project a 4,000 boed production rate by
December 31, 2012.
Management has a storied and successful
past record of substantial value creation.
Very well positioned in a technologically
renewed Alberta Viking resource play.
Recent drilling success bolsters
confidence that future development
activity will lead to real value creation.
Currently trading at the absolute low end
of our peer group on many metrics.
In our opinion, Charger is very cheap and
we believe it is a good time to enter the
Viking play via Charger.
We initiate coverage with a BUY rating
and a $1.50 12-month target price as a
result.
FORECAST (2012E) CURRENT PREVIOUS % ∆
Recommendation -- --
Target Price $1.50 -- nmf
Target EV/DACF mulitple 17.6X -- nmf
Production (boed) 2,970 -- nmf
CFPS $0.14 -- nmf
Net Debt $72.2 -- nmf
SHARE STRUCTURE Q1/12A
Shares O/S (basic, mm) 67.32
Dilutiv es O/S (mm) 9.96
Shares O/S (FD, mm) 77.28
Mangmt. & Directors (basic) 13%
52-w eek trading range $1.20 - $2.12
ENTERPRISE VALUE Q1/12A
Market cap. ($mm) $41.1
Working Capital (surplus) $51.7
Long Term Debt --
Net Debt $51.7
Enterprise Value $92.7
FINANCIAL 2011A 2012E 2013E
CFPS (basic) ($0.06) $0.14 $0.72
EV/DACF multiple nmf 9.4X 1.9X
P/CF nmf 4.4X 0.8X
Cash Flow (C$'000s) ($1.8) $8.4 $48.8
CapEx (E&D+net acquis) $31.0 $40.0 $60.0
Net Debt ($15.0) $72.2 $83.4
WTI oil ($US/bbl) $95.14 $88.84 $100.00
AECO-C ($C/mcf) $3.62 $2.13 $2.70
PRODUCTION 2011A 2012E 2013E
Oil (bpd) 34 1,265 2,426
NGLs (bpd) -- -- --
Natural gas (mmcfd) 0.2 10.2 11.9
Equiv alent (6:1 boed) 63 2,970 4,410
Reorganization
& combination
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 2 of 21
TABLE OF CONTENTS
Investment Summary .................................................................................................................................................3
Management Track Record ....................................................................................................................................3
Alberta Viking Formation Exploitation ...................................................................................................................3
Recent Transaction Provides Valuation Transparency ...........................................................................................3
Valuation ................................................................................................................................................................3
Management Track Record ........................................................................................................................................4
Operations Overview ..................................................................................................................................................6
Halkirk - Provost .....................................................................................................................................................7
Ghost Pine ........................................................................................................................................................... 12
Peace River Arch/Wapiti ...................................................................................................................................... 13
Valuation ................................................................................................................................................................. 14
Corporate Guidance and IWSL Forecast .............................................................................................................. 14
Net Asset Value ................................................................................................................................................... 16
Peer Group Comparison ...................................................................................................................................... 17
Target Price Derivation & Recommendation .......................................................................................................... 18
Appendix - Corporate History .................................................................................................................................. 19
The 4-way Plan of Arrangement .......................................................................................................................... 19
Significant Corporate Events ............................................................................................................................... 20
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 3 of 21
INVESTMENT SUMMARY
We initiate coverage of Charger Energy Corp. (“Charger”, the “Company”
or “CHX”) with a positive BUY rating and a $1.50 per share 12-month
target price based on the following:
MANAGEMENT TRACK RECORD
One of the compelling reasons to own Charger is the past success of
management. Tom Buchanan, Charger’s Chairman & Chief Executive
Officer founded Founders Energy Ltd. (TSX:FDE, delisted) in 1993 from
an initial investment of only $700,000 and ultimately created $3.8 billion in
value by 2012. Founders converted into Provident Energy Trust
(TSX:PVE.UN, delisted) at 5,000 boed in 2001 and Provident then grew
its upstream business to a peak rate of 35,000 boed. The upstream
business was eventually divested and the remaining mid-stream business
was sold to Pembina Pipeline Corp. (TSX:PPL) for $3.8 billion.
ALBERTA VIKING FORMATION EXPLOITATION
The Alberta Viking formation is a play-type that is generating much
industry attention recently. The “resource” play is following the same
pattern of evolution as the Bakken & Viking formations did in
Saskatchewan eight and five years ago respectively; fragmented land
ownership, successful drilling experimentation, development then
corporate consolidation. Charger has an appreciable land position in the
hot technologically renewed Viking formation in Alberta and investors can
therefore enter this play very cheaply, at its formative stages.
RECENT TRANSACTION PROVIDES VALUATION TRANSPARENCY
Cutpick Energy Inc. (private) will be purchased by Crescent Point Energy
Corp. (TSX:CPG) for $425.0 million (not closed yet). The metrics being
paid implies Charger is worth at least double its current trading value.
VALUATION
Charger is trading at $23,942 per producing barrel and $4.59 per reserve
barrel, both metrics being at the absolute low end of our group of 11
junior producers. Reason’s for this are it is a gas-leveraged producer
based on reported results, but will be a liquids levered producer within the
next year. It is also a freshly created producer via a 4-way plan of
arrangement and perhaps the marketplace is waiting for a few quarters of
positive results before it awards Charger a comparable multiple as its
peer group. In any event, we like Charger and initiate with a BUY rating
and a $1.50 12-month target price (146% upside from current trading
levels).
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 4 of 21
MANAGEMENT TRACK RECORD
The track record of success of Management and Directors is a very
compelling factor in owning Charger. Many members of current
Management and Directors were together at Founders Energy Ltd.
including Tom Buchanan, Kelly Cowan and Mark Walker (current Charger
Management) and current Director, Mike Shaikh. Other very notable
directors of Founders were Grant Billing, Byron Seaman and John
Zaozirny.
Founders was founded by Tom Buchanan and Kelly Cowan (see
management below) in 1993 and subsequently converted Founders into
Provident Energy Trust in 2001 – the first junior oil and gas E&P to do so.
Production at the time of conversion was ~5,000 boed.
With Tom Buchanan as President & CEO, Provident grew upstream
production from 5,000 boed in 2001 to a peak of ~35,000 boed via both
the drill bit and accretive acquisitions. Over $7.0 billion in acquisitions
were effected (including midstream acquisitions) with notable upstream
acquisitions of Maxx Petroleum (+7,700 boed), Richland Petroleum
(+4,500 boed), southeast Alberta properties (+3,600 boed), Meota
Resources (+11,400 boed), Olympia Energy (+4,900 boed), Viracocha
Energy (+5,400 boed), Rainbow assets (+5,500 boed), Capitol Energy
(+4,400 boed) and Triwest Energy (+1,300 boed).
In 2009, Provident made the strategic decision to segregate the upstream
business from the significant mid-stream business by divesting its oil and
gas properties, most notably divesting to Crescent Point (-3,646 boed),
Emerge Oil & Gas (-2,200 boed) and Storm Ventures International (-
5,000 boed). The remaining Canadian upstream assets were sold via an
arrangement with Midnight Oil Exploration (-13,130 boed) in June 2010
which together created Pace Oil & Gas (TSX:PCE).
Tom Buchanan architected Provident Energy Trust: its upstream growth,
its midstream business development, its conversion to a dividend paying
corporation and the ultimate divestiture of the upstream business. At the
time of the wind-up of the upstream business, Mr. Buchanan decided to
leave Provident to start another junior oil and gas E&P – Charger Energy
Corp. in October 2010.
The remainder of Provident Energy Ltd. (i.e. the midstream business) was
ultimately sold to Pembina Pipeline for $3.8 billion in April 2012. Tom
Buchanan has been a director of Pembina since August 2010.
In our opinion, this kind of successful history lends confidence in us that
owning Charger will ultimately be very rewarding for shareholders.
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 5 of 21
Name Charger Position Previous Position Years in
O&G
Tom Buchanan Chairman & CEO President & CEO & Director, Provident Energy Trust
28
Dan O’Byrne President & COO Executive VP & COO, Provident Energy Trust
29
Mark Walker VP Finance & CFO Senior VP Finance & CFO, Provident Energy Trust
22
Kelly Cowan VP Corporate Development & Land CEO, Churchill Energy Inc. 28
John Milford VP Exploration & Development Independent Consultant 29
Dan Fournier Legal Counsel & Corporate Secretary Current Partner, Blake Cassels & Graydon LLP
28
Name Current Occupation Other Directorships Director
Since
Tom Buchanan Chairman & CEO, Charger Energy Emera, Pembina Pipeline, Athabasca Oil Sands, Pace Oil and Gas, Hawk Exploration
Mar/6/12
Dan O’Byrne President & COO, Charger Energy Mar/6/12
John Wright Outside Director CHX (1)(2)(3), President & CEO, Petrobank Energy and Resources, President & CEO PetroBakken Energy
Petrominerales (Chairman), Petrobank Energy and Resources
Mar/6/12
Mike Shaikh Outside Director CHX (1)(3) Provident Energy Ltd., Pace Oil and Gas, Hawk Exploration
Mar/6/12
Randall Findlay Outside Director CHX (2)(3), Canadian Helicopters Group, Compton Petroleum, Pembina Pipeline, Superior Plus, Whitemud Resources
Mar/6/12
Daryl Gilbert Outside Director CHX (1)(2), Managing Director, JOG Capital
Jun/15/07
(1) Member, Audit Committee (2) Member, Reserves, Environment, Haelth & Safety Committee (3) Member, Nominating, Governance & Compensation Committee
Source: Company Reports
Exhibit 1 – Charger Senior Management
Exhibit 2 – Charger Board of Directors
Source: Company Reports
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 6 of 21
OPERATIONS OVERVIEW
The combined entity is a very attractive junior E&P with a good
distribution of asset types that should allow Charger to capitalize on any
relative swing in oil versus gas prices.
As it is today, Charger is gas-weighted in terms of both production (63%
gas Q2/12E) and reserves (59% gas pro forma). However virtually all of
Charger’s activities this year are light oil-directed at Halkirk – Provost and
we expect its’ production weighting to gas to decrease to 52% by Q4/12E
and to 45% in 2013E.
Opportunity via undeveloped prospective land is the key to success for
any junior E&P and Charger is well positioned with high working interests
in a total 297,920 net acres (average 73% working interest) plus it has
three separate farm-in deals providing access to a further 231,680 acres
at Charger’s option.
As shown above, a large portion of the total land position came from
Silverback at Halkirk – Provost which complemented Charger (private)
land. Of the four combined companies, Silverback also had the highest
leverage to light oil-prone land, production and reserves.
Exhibit 3 – Charger Areas of Operation
Source: Company Presentation
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 7 of 21
HALKIRK - PROVOST
Halkirk – Provost is Charger’s primary area of focus this year with $58.0
million of its $60.0 million guided capital program allocated to it. The
Viking light oil fairway is shown above in green and covers about 100
sections of Charger’s total 252 section land base.
Farm-in Agreements
In addition to its 110 sections of Crown land and 142 sections of Freehold
land, Charger has two farm-in agreements providing options on an
additional 313 sections as follows:
Halkirk – acquired via Silverback, covers 282 sections, in the
second rolling extension year to March 2014, 10 horizontal Viking
oil wells drilled fulfilled the initial commitment, earns 4 sections per
horizontal well drilled, royalties of 80% of 2009 Crown Royalty
Framework paid to fee simple owner (farmor, EnCana)
Provost – acquired via Charger (private), covers 41 sections, in
first year of a rolling extension to March 2013, 8 earning wells
drilled fulfilled the first year commitment of 6 wells & drilled 2
earning wells in the second option year, earns 2 sections per
horizontal well drilled, royalties of 80% of 2009 Crown Royalty
Framework paid to fee simple land owner (farmor, EnCana)
Exhibit 4 – Halkirk Operating Area
Source: Integral Wealth Securities, Company Presentation
HALKIRK
KILLAM FORSTBURG
BULWARK
BROWNSTONE
CONSORT
NEUTRAL HILLS
SOUTH PROVOST
DENOTES HIGH
PRIORITY VIKING POD
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 8 of 21
Recent Transaction Provides Valuation Transparency
Cutpick Energy Inc. is the most active Viking oil player operating in
Halkirk with 94 horizontal wells drilled to April 2012 and a further 52
locations licensed. Crescent Point announced May 3, 2012 it had entered
into an arrangement agreement to acquire all of the issued and
outstanding shares of Cutpick for $425.0 million (expected closing is June
19, 2012).
Cutpick has current production of 5,600 boed (65% light oil), 300+ net
sections of land in Halkirk (83 net sections prospective for Viking light oil),
300 net identified Viking drilling locations, $260 million in tax pools, 20.5
mmboe 2P reserves. The acquisition metrics are:
Production acquisition value of $73,036/boed
Reserves acquisition value of $19.95/boe ($33.52/boe proved)
Cash flow multiple of 5.1X ($100/bbl WTI, C$2.75/mcf AECO)
Implied Charger Value Using the Cutpick Metrics
There are many parameters to consider in valuing an acquisition, such as
asset concentration, reservoir quality of properties, well performance,
balance sheet etc.
Using the Cutpick metrics however, Charger’s theoretical stock price
would be:
$3.15 on a production basis
$4.60 on a reserves basis
$3.40 on a 2013 cash flow basis
In Charger’s case, its total asset base is not nearly as concentrated as
Cutpick’s, however a large portion of Charger’s land in Halkirk is directly
offsetting Cutpick’s land via Silverback. We also note Cutpick’s horizontal
Viking wells outperformed all other drillers in the Halkirk area by a
significant margin (see exhibit 5 below). Cutpick is also 65% oil weighted
versus Charger being 37% in Q2/12E, so it is unlikely Charger would, at
the end of the day, garner Cutpick’s metrics. But in our view it is clear,
Charger is currently heavily discounted given its exposure to the Viking at
Halkirk.
Halkirk Viking Well Performance To Date
We analyzed a 210 horizontal well-set of Viking producers at Halkirk to
the end of February based on publicly available data. The average IP30
of all wells was about 100 boed with gas-to-oil ratios of about 1,000 cf/bbl.
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 9 of 21
As shown above, the average well produces an IP30 of 100 boed while
Cutpick wells produced an average of 160 boed, making those wells
economically superior to all else.
Viking Economics
There are varied drilling and completion methods by operators in the area
and, to a large extent, involve the length of the horizontal lateral:
Short laterals – drilled and completed monobore (i.e. continuous
production tubing from wellhead to toe), 600 – 800m horizontal
leg, 14 stage frac
o IP30 expected to be 55 bpd (66 boed)
o EUR expected to be 74.4 mbbls (89.3 mboe)
o Total capital cost (assuming no Pad) $1.425 million
Long laterals – 1,000 – 1,400m horizontal leg (0.9 miles), 16-18
stage frac
o IP30 expected to be 85 bpd (102 boed)
o EUR expected to be 109.2 mbbls (131.0 mboe)
o Total capital cost (assuming no Pad) $1.98 million
Pad drilling, where four (or more) legs are drilled from the same location,
economizes capital via shared tankage etc and tie-in costs. The savings
are $150,000 - $300,000 per well. In the interest of conservatism
however, we ran all of our economics without pad drilling savings.
0
25
50
75
100
125
150
175
0 2 4 6 8 10 12 14 16 18 20 22 24
Pro
duct
ion
Rat
e (B
OE
D)
Production Months
All Producer Hz Viking WellsGreater Halkirk, AB Region
Cutpick Halkirk East (58)
Cutpick Provost (33)
Penn West (17)
Equal (18)
Charger (7)
Silverback (13)
All Other Producers (51)
Westfire (13)
Average (200 of 210)
Avg. regression (200 of 210)
y = -30.01ln(x) + 101.26
0
25
50
75
100
125
150
175
0 2 4 6 8 10 12 14 16 18 20 22 24
Pro
duct
ion
Rat
e (B
OE
D)
Production Months
All Producing Hz Viking WellsHalkirk (200 of 210-well set)
Best well - IP 994 boedCutpick - Halkirk East
Exhibit 5 – Halkirk Hz Viking Well Performance and Average Curves by Producer
Source: GeoScout, Integral Wealth Securities
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 10 of 21
In addition to horizontal leg length, there is also an economic difference
between crown land drilling and freehold/farm-in drilling in terms of
royalties. The Alberta Provincial Government materially increased Crown
royalties effective January 2009 but then reduced royalties effective
January 2011. Freehold & farm-in drilling are subject to royalties of 80%
(negotiated) of the 2009 Royalty Framework, which do not qualify for the
new well royalty cap on horizontal wells. This program, pursuant to the
2011 Royalty Framework, limits royalties payable on new horizontal wells
to 5% for the first 50,000 bbls of production or the first 18 months,
whichever comes first (better incentives for deeper, longer reach
horizontal wells). The result being crown land drilling is marginally more
economic than drilling on freehold or farm-in land as follows:
Short-reach wells drilled on Crown land offer the best economic return,
followed by long-reach wells drilled on Crown land. It should be noted
though, the ideal drilling candidate is governed more so by reservoir
quality and deliverability than on marginal economic differences, such as
at Neutral Hills discussed below.
Exhibit 6 – Halkirk Hz Viking Economic Metrics (Sproule April 1, 2012 Price Forecast)
Source: Integral Wealth Securities
Short Short Long Long
Metric Crown Freehold/Farm Crown Freehold/Farm
IRR 42.8% 35.0% 49.5% 37.0%
ROR (@ 10% disc.) 133.3% 121.1% 138.3% 121.9%
NPV (10%, p.t., $000s) $1,884.5 $1,710.7 $2,715.2 $2,393.4
NPV/boe $21.10 $19.15 $20.73 $18.27
Onstream cost ($/boed) $36,387 $36,387 $31,887 $31,887
F&D cost ($/boe) $15.95 $15.95 $15.12 $15.12
Cash netback/boed $59.55 $43.97 $60.64 $40.95
Recy cle ratio 3.7X 2.8X 4.0X 2.7X
Pay back (months) 23 30 18 28
Exhibit 7 – Halkirk Viking Short Reach Hz (left) & Long Reach Hz (right) Type Curves
Source: Integral Wealth Securities
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
0
10
20
30
40
50
60
70
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Production & Reserves Type Curve
Avg. Annual Production (boed) Cumulative Production (mboe)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
0
5
10
15
20
25
30
35
40
45
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Production & Reserves Type Curve
Avg. Annual Production (boed) Cumulative Production (mboe)
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 11 of 21
In addition to the 11 wells drilled into the Viking so far, Charger is ready to
put a 4-well pad on production at Neutral Hills within the greater Halkirk
area (shown below).
Black wells are on production, the red wells make up the 4-well pad, the
blue wells are future development locations and the grey wells are future
infill locations.
In its first quarter results press release, Charger stated it is very
encouraged by the test rates of the pad wells and expects these wells to
deliver IP30’s similar to other wells drilled at Neutral Hills, such as 16-35-
36-8W4 and 102/16-35-36-8W4 (two black wells which both IP’d over 100
boed).
As we will discuss under the section entitled “Valuation”, we are only
considering future development at Halkirk, Neutral Hills and Consort in
setting our target price for Charger.
Exhibit 8 – Neutral Hills Development Plan
Source: Company Presentation
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 12 of 21
GHOST PINE
The legacy Twining Comingled
pool (primarily Pekisko) has
generated some new-found
interest given horizontal, multi-
frac drilling technology.
Connacher Oil & Gas (TSX-
CLL) is the most active player
in the Pekisko at Twining with 7 Horizontal wells drilled to date, however
Connacher currently has this property (amongst others) up for sale.
Based on recent discussions with Connacher, our model assumes well
costs of $4.0 - $4.5 million, assumed IP30’s of 160 boed (75% oil) and
EUR’s of 162 mbbls of 30o API oil. Our model returned a 20% IRR,
$18.47/boe F&D cost and a 47-month payback – not stellar metrics in our
view. Our experience suggests the horizontal Pekisko play is risky given it
is just emerging – technologically - with less than robust economic
metrics.
Charger has 50 crown sections, one freehold section and a 49-section
farm-in option. A 43-section farm-in expires on July 31, 2012 and commits
Charger to drill seven wells by that time, including a Viking horizontal, a
Mannville horizontal and a Pekisko horizontal. It is unclear whether or not
the 7 wells will be drilled over the next six weeks and as such, we assume
Charger is trying to negotiate an extension to the expiry date.
CLL wells
Exhibit 9 – Ghost Pine Operating Area
Source: Company Presentation
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 13 of 21
PEACE RIVER ARCH/WAPITI
The Peace River Arch and Wapiti properties came via Seaview and
represents low cost gas production (PRA) and significant oil and liquids
rich gas resource potential in the Cardium formation (Wapiti) across
72,320 net acres (46% average interest).
There has been some industry activity in the Cardium at Wapiti since
2010, but with mixed results as to liquids content and productivity due to
under-pressurization. Wells in this area are expensive at $3.8 - $4.2
million with initial productivities not that much better than a typical Bakken
well (i.e. 125 – 140 boed). With that, Charger does not plan to drill this
area in 2012 and we have not included any NPV estimates as a result.
Once gas prices recover however, the PRA and Wapiti represent
excellent properties to quickly drill and bring-on gas production.
Exhibit 10 – Peace River Arch/Wapiti Operating Area
Source: Company Presentation
Oil prone in north
Liquids rich gas
prone in south
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 14 of 21
VALUATION
CORPORATE GUIDANCE AND IWSL FORECAST
The strategic business combination and reorganization transaction was
announced on November 21, 2011 and was expected to close in late
January/early February. With the closing announcement actually taking
place on March 7, 2012, the assets were not worked according to original
schedule. As a result of the closing delay, 2012 corporate average
production guidance of 4,600 – 5,100 boed, based on a $75 million
capital program, was pared back to 3,500 boed (45% liquids) and a 2012
exit rate of 4,400 boed, based on a $60 million capital program.
Our 2012 outlook is lower than current corporate guidance given a lower
commodity price outlook. In our view, lower capital spending due to debt
limit constraints is required and thus a lower average production rate is
expected to result.
We are forecasting capital spending of $40 million in 2012 which results
in our forecast of 25 new wells versus the corporate forecast of 35 wells.
Based on our capital spending assumption, we forecast average
production of 2,970 boed in 2012 which would generate $8.4 million in
cash flow on the year based on our commodity price forecast above.
Because the transaction closing was not announced until March 7, 2012,
results are not indicative of full year effect of the combined entity. We are
therefore valuing Charger based on the full-year 2013, which in our model
assumes capital spending of $60.0 million, generating average production
of 4,410 boed and cash flow of $48.8 million ($0.72 per share). Although
we are showing an aggressive 2013/2012 average production growth rate
of 48%, we have comfort given:
2012 average production does not reflect the full year effect of the
combination
Exhibit 11 – IWSL Commodity Price Outlook
Source: Integral Wealth Securities
Q1/12A Q2/12E Q3/12E Q4/12E 2011A 2012E 2013E
West Tex as Interm. US$/bbl $102.88 $92.65 $80.00 $80.00 $95.14 $88.84 $100.00
Edmonton Par C$/bbl $91.44 $78.73 $65.00 $65.00 $95.18 $74.98 $97.00
Hardisty 12o Heav y C$/bbl $85.29 $69.77 $56.50 $56.50 $83.40 $66.95 $72.75
------------ Quarterly Price Assumptions ------------ ----- Annual Price Assumptions -----
Ny mex Henry Hub US$/mcf $2.52 $2.35 $2.70 $2.97 $4.03 $2.63 $3.30
AECO spot $C/mcf $2.18 $1.89 $2.10 $2.37 $3.62 $2.13 $2.70
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 15 of 21
Our base case exit 2012 production is 4,000 boed versus 4,400
boed guided by Charger
After 25 Viking wells are drilled at Halkirk by the end of 2012,
drilling and completion methods will be optimized for maximum
well performance
Exhibit 12 – Forecast Model
Source: Integral Wealth Securities
C$000s CURRENT PREVIOUS % r CURRENT PREVIOUS % r
Recommendation
Target price $1.50 -- nmf $1.50 --
MULTIPLES
Target EV/DACF multiple 17.6X -- nmf 3.7X -- nmf
Current EV/DACF multiple 9.4X -- nmf 1.9X -- nmf
Current P/CFPS multiple 4.4X -- nmf 0.8X -- nmf
PRODUCTION
Oil (bblsd) 1,265 -- nmf 2,426 -- nmf
NGLs (bblsd) -- -- nmf -- -- nmf
Gas (mmcfd) 10.2 -- nmf 11.9 -- nmf
Equiv alent (6:1) 2,970 -- nmf 4,410 -- nmf
COMMODITY PRICES
WTI oil price (US$) $88.84 -- nmf $100.00 -- nmf
Edmonton light oil price (C$) $74.98 -- nmf $97.00 -- nmf
Henry Hub gas price (US$) $2.63 -- nmf $3.30 -- nmf
AECO spot gas price (C$) $2.13 -- nmf $2.70 -- nmf
Corp. oil price realization $67.50 -- nmf $94.00 -- nmf
Corp. NGL price realization $63.74 -- nmf $82.45 -- nmf
Corp. gas price realization $2.11 -- nmf $2.76 -- nmf
Corp. equiv . price (C$, 6:1) $35.54 -- nmf $59.14 -- nmf
Netback (cash flow /boed) $7.69 -- nmf $10.14 -- nmf
FINANCIAL
Rev enue 38,638 -- nmf 95,199 -- nmf
Cash flow from operations 8,360 -- nmf 48,789 -- nmf
CFPS (basic) $0.14 -- nmf $0.72 -- nmf
Net Income (18,954) -- nmf 5,273 -- nmf
EPS (basic) ($0.30) -- nmf $0.08 -- nmf
CapEx (E&D + net acquis/div est) 40,000 -- nmf 60,000 -- nmf
Net debt (end of period) 72,236 -- nmf 83,447 -- nmf
Av erage shares O/S (basic) 60,118 -- nmf 67,321 -- nmf
----------------- 2012E ------------------ ----------------- 2013E -----------------
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 16 of 21
NET ASSET VALUE
Combined reserves have not yet been evaluated by a single engineering
evaluator, however we believe it is likely a “unified” report will be
completed by the end of Q3/12E.
For year-end 2011 reserves, the original reserve evaluators for the four
companies were used but a unified price forecast was applied - the
December 31, 2011 Sproule & Associates price forecast.
The independent reports were:
Charger Sproule effective December 31, 2011
Seaview Sproule effective December 31, 2011
Silverback Insite effective December 31, 2011
Sirius GLJ effective December 31, 2011
Our calculated NPV10% using the Sproule December 31, 2011 price
forecast was very close to the $176.9 million shown in Charger’s annual
information form. Our NAV calculated above uses the March 31, 2012
Sproule price forecast and reported Q1/12 balance sheet items.
As shown, Charger, trading at $0.61, is trading well below its computed
NAV of $2.28/share ($2.15/FD share) as at March 31, 2012 and
represents a Price to NAVPS of 0.3X.
Exhibit 13 – Estimated Net Asset Value as at March 31, 2012
Source: Integral Wealth Securities
($000) 0% 10% 15% 20%
Prov ed
Producing 82,175 46,647 37,409 30,870
Non-producing 18,170 11,924 10,138 8,805
Undev eloped 119,284 63,187 48,504 38,144
Total Prov ed 219,629 121,758 96,051 77,819
Total Probable 137,091 63,636 45,504 33,119
Total Prov ed + Probable 356,719 185,394 141,555 110,938
Net undev eloped land 19,776
Long term debt --
Current assets 12,634
Current liabilities (64,302)
Other assets/liablilities --
Total balance sheet items (31,892) (31,892) (31,892) (31,892)
Net asset v alue - basic 324,827 153,502 109,663 79,046
Options ex ercise proceeds 12,893
Net asset v alue - fully diluted 337,720 166,395 122,556 91,939
Net asset v alue per basic share $4.83 $2.28 $1.63 $1.17
Net asset v alue per fully diluted share $4.37 $2.15 $1.59 $1.17
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 17 of 21
PEER GROUP COMPARISON
In our group of 11 junior producers, it is interesting to note that the pattern
of increasing EV/BOED and EV/BOE is directly proportional to increasing
leverage to liquids. At the low end, Open Range and Charger are only 9%
and 39% respectively leveraged to liquids production (Q1/12A) while at
the other end of the spectrum, Whitecap and Second Wave are 68% and
77% liquids leveraged. (note: Vero appears to trade to a low EV/BOED
due to Q1/12A results only partially reflecting its gas disposition in the
average).
Exhibit 14 – Comparative Enterprise Values per Producing & Reserve Barrel Equivalent
$0
$20,000
$40,000
$60,000
$80,000
$100,000
ONR CHX VRO MEI AXL HYX TBE NVS DTX WCP SCS AVG.
Enterprise Value/BOED
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
CHX ONR MEI AXL HYX NVS WCP TBE VRO SCS DTX AVG.
Enterprise Value/BOE
Source: Integral Wealth Securities
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 18 of 21
TARGET PRICE DERIVATION & RECOMMENDATION
In setting our target prices, we prefer to use a hybrid approach that
incorporates a “normalized” cash flow multiple component, plus a risked
development upside component based on our NPV analysis.
In our view, the marketplace is not rewarding producers that are in the
process of de-leveraging to natural gas right now. We believe the market
wants to see the actual de-leveraging to natural gas transition being
executed in reported results and, until that time, or until natural gas prices
start normalizing relative to crude oil prices, gas-leveraged producers will
continue to trade to lower multiples than liquids leveraged producers.
In terms of setting target prices for junior producers then, we would tend
to use a 3.5X EV/DACF multiple (2013) for our cash flow component
assuming a 60% liquids leverage. For Charger, despite its huge liquids
growth opportunity at Halkirk, we are using a 3.0X target EV/DACF
multiple due to its reported gas leverage. We therefore start with a
resulting $0.90 per share cash flow component in setting our target price.
For the future growth component of our target price, we are only
considering the three high priority pods at Halkirk - Provost, namely
Halkirk, Neutral Hills and Consort which collectively represent
approximately 31 gross sections. We assume an average 91% working
interest and 80 acre spacing (8 wells per section) and therefore compute
228 un-risked locations. We further assume 75% of the locations are
prospective, then risk drilling with a 75% chance of success, all leading to
our calculated 128 hard drilling locations across the three high priority
pods.
For simplicity, we take the risked 128 locations, assume the locations are
drilled evenly between short-reach on Crown land, short-reach on
freehold/farm-in land, long-reach on Crown land and long reach on
freehold/farm-in land and apply the computed NPV’s shown in exhibit 6.
We assume all 128 locations are drilled evenly across five years such that
the resulting $278.4 million sum of annual NPV upside is present valued
back to today (5 years, 10% discount rate) to equal a $208.7 million NPV
upside, or $3.10 per share. Lastly, we credit our target price with only
20% of that, or $0.62 per share, representing just one year of future
drilling.
So, our $1.50 target price is based on $0.90 per share (3.0X EV/DACF)
and $0.62 per share (20% of risked development at 3 of 5 Viking pods at
Halkirk). With that, our target price is conservative in our view and
represents more than a double from current trading levels. Accordingly,
we rate Charger a BUY.
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 19 of 21
APPENDIX - CORPORATE HISTORY
THE 4-WAY PLAN OF ARRANGEMENT
On November 21, 2011, Seaview Energy Inc. (TSXV:CVU.A) announced
it entered an arrangement agreement, dated November 11, 2011, to
effect a strategic business combination with Charger Energy Corp.
(private), Silverback Energy Ltd. (private) and Sirius Energy Inc. (private)
to form a public, light oil focused, growth oriented junior exploration and
production company (or “E&P”).
The transaction closing was announced on March 7, 2012 and had the
following characteristics:
Each Charger share was exchanged for 3.6364 Seaview shares for
$72.5 million in value (based on the November 11, 2011 CVU.A
closing price of $0.53)
Each Silverback share was exchanged for 5.8181 Seaview shares for
$54.4 million in value
Each Sirius share was exchanged for 0.80 Seaview shares for $11.1
million in value
Each class B Seaview share was exchanged for 10.0 Seaview class A
shares
Seaview class A shares were consolidated 1 for 5 resulting in
“Amalco” shares outstanding of 67.3 million and fully diluted shares
outstanding of 77.3 million (8.0 warrants, 2.0 million options)
Seaview changed its name to Charger Energy Corp. and began
trading on the TSXV under the changed symbol of CHX from CVU.A
(March 8, 2012). Note: the stock chart on the cover reflects CVU.A to
March 8, 2012, thereafter the combined CHX
Management of the former Charger (private) replaced Seaview
management
The arrangement constituted a reverse takeover transaction (TSX
Venture exchange Policy 5.2) resulting from Charger management
replacing Seaview management.
The characteristics of the combined company at the time of closing were:
Production of 3,500 boed (30% liquids) and proved and probable
reserves as at September 30, 2011 of 19.3 mmboe (59% proved, 39%
liquids)
Undeveloped land of 120,000 net acres plus 230,000 net acres of
farm-in option land
Charger Energy Corp. June 12, 2012
Jeffrey J. Fiell, CFA (403) 536-5457 Page 20 of 21
Enterprise value of $214 assuming Seaview’s price at transaction
closing ($0.53), exchange ratios and estimated net debt
Estimated pro forma net debt of $36 million at the time of
announcement with a $65 million revolving operating line
Tax pools of $150 million
Enterprise valuation metrics of $55,370/boed and $18.29/boe
SIGNIFICANT CORPORATE EVENTS
Seaview Energy Inc. (formed in 2006, public in October 2007):
Completed a large asset acquisition in the Peace River Arch area for
$26.5 million (June 2009)
Issued 15.4 million shares for gross proceeds of $15.7 million (June
2009)
Disposed of assets in southeast Saskatchewan for $33.0 million
(August 2011)
Charger Energy Corp. (private, formed in October 2010 and public,
formed in March 2012):
Founding and incorporation (September 2010)
Issued 20.0 million shares for gross proceeds of $20.0 million
(December 2010)
~60 boed acquisition for $2.4 million (April 2011)
Farmed-in on 41 sections over a 32 township block at Halkirk -
Provost, AB prospective for light Viking oil (December 2010)
Issued 17.1 million shares for gross proceeds of $30.0 million (June
2011)
Farmed-in on 43 sections at Ghost Pine, AB prospective for Viking,
Mannville and Pekisko light oil (July 2011)
Acquired a further 29 sections at Crown land sales in both Halkirk and
Ghost Pine (2011)
Drilled 8 successful farm-in earning wells for Viking light oil at Halkirk
(2011)
Drilled a further two Viking oil wells at Halkirk (2012)
Engineered the four-way arrangement (November 2011) and closed
(March 2012)
Drilled its first 4-well pad at Halkirk (Neutral Hills “pod”) and expected
to be on production this week.
TORONTO
900-56 Temperance St. Toronto, ON M5H 3V5 T 416 203 2000 F 416 860 9669
CALGARY
Suite 1510, 555 – 4th Avenue SW
Calgary, AB T2P 3E7 T 403 444 1392 F 403 444 1397
DISCLOSURE:
1) Jeffrey Fiell is an employee of Integral Wealth Securities and certifies that the recommendations and opinions expressed in this research report/sales literature accurately reflect his views on the issue discussed herein.
2) The particulars contained herein were obtained from sources that we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the security mentioned herein.
3) Integral endeavors to make reasonable efforts to disseminate research to all eligible clients in a timely manner, through either physical or electronic distribution, such as e-mail, or by posting to Integral’s proprietary website.
4) The compensation of research analysts is intended to reflect the value of the services they provide to the clients of Integral. As with most other employees, the compensation of research analysts is impacted by overall profitability of the firm, which may include revenues from investment banking activities of the firm’s Corporate Finance department. Research analysts’ compensation is not, directly related to any specific corporate finance transaction. Issuers are not permitted to pay any expenses associated with a visit to its material operations by the research analyst.
5) Currently Integral does not own, control or beneficially direct more than 1% of the equity issue of this security.
6) The analyst that prepared this research report, does not hold any of the issuers security directly or indirectly (such as, through derivatives).
7) Integral has provided advisory and corporate finance arrangements with the Company and has received commissions within the last 12 months.
8) Integral serves in an advisory capacity to the Company on an on-going basis.
9) Integral has and may continue to maintain a position in the Company from time to time.
10) Integral hereby states that, there has been no involvement or influence directed in any shape or form for the approval of this research report by the investment banking department.
11) Valuation “re. Target Price” see applicable section.
12) Integral has not participated in any buy-back or repurchase agreement in the issuers equity within the last 12 months.
13) No employee, Director or Officer of Integral receives any form of remuneration from the Company directly or indirectly.
14) No employee, Director or Officer of Integral is currently or has previously served on the Company Board of Directors.
Jeffrey J. Fiell, CFA Vice President – Research Analyst (403) 536-5457 [email protected]
Dan Martin, CFA Oil & Gas Investment Banking (403) 444-1395 [email protected]
Paul Klemke Oil & Gas Investment Banking (403) 444-1393 [email protected]
Stephen Hughes Oil & Gas Institutional Sales (403) 444-1394 [email protected]
Adrian Turchet Mining Investment Banking (416) 583-5219 [email protected]
Jeff Brandes Trading (416) 640-5171 [email protected]
John Gibson CEO/Investment Banking (416) 203-5864 [email protected]