Journey Energy presentation at the Peters Energy conference today. Webcast...
https://www.petersco.com/news_prior.cfmJourney Energy Inc.
(JOY-t: c$1.72)
August 30, 2018
BUY (from Neutral)
Target: C$3.15 (from C$2.25)
Adam Gill, CFA / (403) 232-1243
agill@viiicapital.com
Tin Duong, P.Eng / (403) 232-2191
tduong@viiicapital.com
Duvernay Farm-Out Unlocks Trapped Potential and Provides Clarity on Land Value Journey has stuck a farm-out deal with Pat Carlson's private Kiwetinohk Resources in the Duvernay. We believe this is an immensely important deal for Journey as it unlocks trapped value and implies ~$0.90/share of land value on their remaining position which we believe has zero value in shares today.
· Good Deal to Unlock Trapped Value: With the deal, Kiwetinohk has committed to drill two wells with a five well option to essentially earn a 62.5% WI (plus operatorship) in 140 sections of Duvernay lands. Overall, we believe the most important parts of this deal are: 1) it shows that this western reef edge with ~30 metres of net pay is getting more attention from new players; and 2) the valuation of the farm-in helps remove uncertainty on Journey's land value (more on that below).
· Limited 2018/19 Impact But Will See De-risking: We do believe that any production impact to Journey will be muted over 2018 and 2019, given the need for the wells to payout (which we believe will take ~18 months), so we have not made any changes to our 2018 or 2019 production or cash flow estimates at this time. That said, the seven wells will be drilled over a large spread of the land base and we expect all will be spud by the end of 2019, providing drilling result catalysts over the next 18 months.
· Offsetting Results: Raging River [now part of Baytex (BTE-BUY; $8.50 PT, covered by P. Skolnick)] has drilled a well in similar rock about 27 miles north of Journey’s land base. We have 5 months of public production data with the well cumulating 34 MBbl of oil by the end of July as outlined in Figure 1, as this will be the best analogy for Journey’s lands at this time. Raging River completed the drilling of two more wells of the same pad ~5 miles to the SW of the 14-36 wells, showing the activity is picking up in the area.
Land Value & Target Price Increase
· Implied Land Value is $36 MM: If Kiwetinohk completes the full seven well farm-in, we believe it will involve a capital commitment of ~$60 MM. This is $60 MM to earn a 62.5% interest in ~140 sections of land (outside of differing WI on the earn-in wells). This implies a land value of ~$685,000/section. If we apply this to Journey’s remaining net interest of 52.5 sections, we get an implied value of $36 MM. This equates to $0.93 per share for just the raw land value.
· With a clearer picture of the value of Journey’s Duvernay land base, we have increased our price target by $0.90 to $3.15 from $2.25. This drives up the implied return to 83% (from 31%), which now stands well ahead of the oil E&P peer average of 50%. With that, we are also upgrading our rating on Journey to BUY from NEUTRAL.
· Note, the remainder of our prior $2.25/share valuation remains the same based on a 3.0x 2019E EV/DACF target multiple (a ~3.5 point discount to oil E&P peer group) and a 50% discount to our NAVPS weighted 50/50.