Professional Documents
Culture Documents
13)
J. Frederick Kozak, P.Eng. (403-509-1938, fkozak@haywood.com)
David Warkentin, P.Eng. (403-509-1926, dwarkentin@haywood.com)
August 4, 2006 MEMBER CIPF
Investment Brief – Oilexco is a public international junior oil and gas exploration company that is focused on opportunities in the
U.K. North Sea. Through a carefully thought-out and executed strategy, the Company has discovered an oil field due to come onstream
in Q4/06 at approximately 30,000 bbl/d and has unrisked exposure to significant incremental production from new exploration projects.
Price Performance Expectations – Based on the test results to date, Brenda could exceed our
2007 production estimates as previously published. However, until we have
$8.00
Oilexco Incorporated (OIL-TSX)
sufficient production history, our estimates remain unchanged.
$7.00
Valuation – Our target price of $12.00 represents a 4.3x multiple of 2007
$6.00
fully diluted CFPS. We note that the upside potential is still significant, as
$5.00
there is no exploration success factored into our estimates. We also note that
$4.00
other international producers command multiples of as much as 10.0x CFPS.
$3.00
50 Day M.A.
Catalysts – Our forecast for 2006 is based on a conservative estimate of
$2.00
200 Day M.A.
initial production rates from the Brenda field. Better than expected
$1.00
Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 production results would have a positive effect on our view of Oilexco.
4.0
2.0
Volume in Millions
However, should the onstream timing of the Disraeli/Sheryl discovery occur
0.0 in 2007, it would have a positive impact on our view of the Company.
Source: Bloomberg
Industry & Company Profile Revisions, Date of Record Risk Profile Moderate
Oil and Gas – Oilexco is a junior oil and gas exploration Rating – New, September 28, 2005 Forecast Risk Moderate
company that is focused on oil and natural gas in the U.K. Target – Increased to $12.00 from $8.00, August 2, 2006 Financial Risk Moderate
North Sea. Forecast – Revised 2006, 2007, and 2008 estimates, August 4, 2006 Valuation Risk Moderate
Please see rating structure, important disclosure, risk profile parameters, disclaimers,
and notes on pages 7-10 of this report.
Oilexco Incorporated
Valuation Parameters
Current Price / F/D CFPS (multiple) 11.8 2.5 3.1 (79%) 22%
Debt-Adjusted CF Multiple 1.7 1.2 (28%)
Target Price / F/D CFPS (multiple) 19.9 4.3 5.2 (79%) 22%
Current Price / F/D EPS (multiple) 20.8 3.5 5.1 (83%) 45%
EV/boe/d $43,908 $39,374 (10%)
Target EV/boe/d $62,685 $51,375 (18%)
Price Assumptions
Crude Oil WTI (US$/bbl) $56.54 $67.50 $65.00 $65.00 (4%) 0%
Company Average (C$/bbl) $53.92 $64.77 $63.56 $63.56 (2%) 0%
AECO (C$/GJ) $8.37 $6.67 $7.51 $7.51 13% 0%
Company Average (C$/GJ) $11.38 $6.09 $6.77 $6.06 11% (10%)
Source: Haywood Securities
Investment Thesis
Oilexco’s management is a well-experienced, hands-on team that has
developed and executed a strategy that is on the verge of returning great
success. Combining the operational and technical expertise of senior
management with the geological and engineering skills of the remainder of the
team, Oilexco will deliver meaningful production growth late in 2006, with
significant exposure to other high-impact projects in 2006 and beyond. We
recommend the Company to investors for this exposure. We are maintaining our
rating for Oilexco Incorporated (OIL–T) of SECTOR OUTPERFORM and our
12-month target price of $12.00 per share.
Operational Update
Oilexco announced the production test results for the final well drilled at
Nicol in the U.K. North Sea. The well flowed at 10,165 bbl/d on testing. We
note, however, that this rate was again limited by testing equipment aboard the
Sedco 712 semi-submersible drilling rig, as well as by restrictions imposed by
the U.K. regulatory authorities as to how much oil could be burned. The
following table summarizes all of the individual Brenda/Nicol wells’ test rates.
Combined with the three Brenda wells, the Nicol results are very positive for
Oilexco. We note that the Nicol test did not encounter any sand or water, and
neither did any of the three Brenda wells. Oil wells in the North Sea have the
potential for high decline rates as a result of water influx, and we are encouraged
there was no water or sand production, as both are indicators of early production
decline. All four wells have been completed with subsea wellheads and are ready
to be tied in to the production manifold, to be installed in September, with first
production on schedule for sometime in October.
While indicated test volumes are impressive, we note that the wells will not
be produced at these rates. Oilexco reiterated in the press release announcing
the Nicol test results that good reservoir management practices will be observed
in order to maximize the recovery of the oil reserves and prevent premature water
breakthrough. Oilexco has a state-of-the-art subsea manifold system whereby it
can test every well in “real time” and adjust each well’s production as required to
fully exploit the oil at Brenda and Nicol. Based on a 56,000 bbl/d total calculated
flow rate, we would expect that the four wells would be produced at 50% to 60%
of the 56,000 bbl/d total or 28,000 bbl/d to 33,600 bbl/d.
Revisions to Estimates
2006E 2007E 2008E
Production Revised Previous Change % Revised Previous Change % New
Liquids (bbl/d) 6,760 6,460 300 5% 30,487 26,952 3,535 13% 33,994
Gas (mmcf/d) 0.0 0.0 0.0 0% 0.0 0.0 0.0 7% 0.0
Total (boe/d) 6,768 6,468 300 5% 30,490 26,955 3,535 13% 34,001
Sales Price
Liquids Price ($/bbl) $64.77 $64.77 ($0.00) (0%) $63.56 $63.56 $0.00 0% $63.56
Gas ($/GJ) $6.09 $6.09 $0.00 0% $6.77 $6.77 $0.00 0% $6.06
Equivalent ($/boe) $64.74 $64.74 ($0.00) (0%) $63.56 $63.56 $0.00 0% $63.56
Financials
Cash Flow ($M) $115.0 $108.9 $6.1 6% $530.4 $464.3 $66.1 14% $434.8
F/D CFPS $0.54 $0.51 $0.03 6% $2.50 $2.19 $0.31 14% $2.05
Earnings ($M) $67.7 $62.8 $4.9 8% $378.7 $328.7 $50.0 15% $260.4
F/D EPS $0.30 $0.28 $0.02 8% $1.79 $1.55 $0.23 15% $1.23
Net Debt ($M) $85.3 $91.4 ($6.1) (7%) ($195.0) ($172.8) ($22.2) 13% $379.8
Trailing D/CF (multiple) 0.7 0.8 (0.1) (12%) (0.4) (0.4) 0.0 (1%) (0.9)
Capital Expenditures ($M) $280.0 $280.0 $0.0 0% $250.0 $200.0 $50.0 25% $250.0
Source: Haywood Securities
2006 Outlook
The rest of 2006 will see significant news flow as Oilexco continues with
North Sea operations. We are again updating the previously published table
below with the results of the Brenda/Nicol production well testing. The
remainder of 2006 will be a mix of production and exploration news and
promises to provide positive support to Oilexco’s share price.
Valuation
To value Oilexco shares, we use a multiple of cash flow. The shares currently
trade at 11.8x our estimated 2006 fully diluted CFPS but only 2.5x our 2007 fully
diluted CFPS. Our production profile assumes production from Brenda/Nicol
coming on midway through Q4/06, with additional production from Sheryl
coming onstream in Q4/07. Our 12-month target reflects 4.3x 2007 estimated
after tax fully-diluted CFPS, but note that Oilexco becomes taxable in Q4/07
under our assumptions.
$14.00
Closing Price
$12.00 Target Price
$10.00
Price ($CAD)
$8.00
$6.00
$4.00
$2.00
$-
10/4/2005
11/16/2005
12/30/2005
2/13/2006
3/27/2006
5/9/2006
6/21/2006
8/3/2006
Distribution
This report is for distribution in Canada and to institutional clients in the United States.
Analyst Certification
I, J. Frederick Kozak, hereby certify that the views expressed in this report (which include the rating assigned to
the issuer’s shares as well as the analytical substance and tone of the report) accurately reflect my/our personal
views about the subject securities and the issuer. No part of my/our compensation was, is, or will be directly or
indirectly related to the specific recommendations.
Important Disclosures
This report is prepared by Haywood Securities Inc. for use by Haywood Securities Inc., Haywood Securities
(USA) Inc. and Haywood Securities (UK) Limited and their clients. Haywood Securities Inc. is a Canadian
broker-dealer and a member of the Toronto Stock Exchange and the Canadian Venture Exchange. Haywood
Securities (USA) Inc. is a wholly owned subsidiary of Haywood Securities Inc., registered with the U.S.
Securities and Exchange Commission, and is a member of the National Association of Securities Dealers (NASD)
and the Securities Investor Protection Corporation (SIPC).
Haywood Securities, Inc., and Haywood Securities (USA) Inc. do have officers in common however, none of
those common officers affect or control the ratings given a specific issuer or which issuer will be the subject of
Research coverage. In addition, the firm does maintain and enforce written policies and procedures reasonably
designed to prevent influence on the activities of affiliated analysts.
Of the companies included in the report the following Important Disclosures apply:
• The Analyst preparing this report (or a member of the Analyst’s households) has a financial interest in
TransGlobe Energy (TGL–T), Candax Energy Inc. (CAX–T), and Oilexco Inc. (OIL–T).
• Haywood Securities, Inc. has reviewed lead projects of Oilexco Inc. (OIL–T), Candax Energy Inc. (CAX–T),
and PanOcean Energy (POC.B–T), and a portion of the expenses for this travel have been reimbursed by the
issuer.
• Haywood Securities, Inc. or an Affiliate has managed or co-managed a public offering of securities for
Oilexco Inc. (OIL–T) and PanOcean Energy (POC.B–T) in the past 12 months.
• Haywood Securities, Inc. or an Affiliate has received compensation for investment banking services from
Oilexco Inc. (OIL–T) and PanOcean Energy (POC.B–T) in the past 12 months.
Other material conflict of interest of the research analyst of which the research analyst or member knows or has
reason to know at the time of publication or at the time of public appearance:
• n/a
Rating Structure
SECTOR OUTPERFORM – Haywood’s top rating category. The analyst believes that the security will
outperform its sector. Furthermore, the shares are forecast to provide attractive returns measured against
alternative investments when considering risk profiles. The rating carries a minimum total return threshold of
15% for equities and 12% for trusts. The rating applies to companies that have tangible underlying assets that give
a measure of support to the market valuation. The rating category considers both the absolute and relative values
in assigning the highest rating on the security.
SECTOR PERFORM – The analyst believes that the security will trade with tight correlation to its underlying
sector. Furthermore, the target price (together with any anticipated distributions) is at or above the market price,
and forecast risk-adjusted returns are attractive relative to alternative investments.
SECTOR UNDERPERFORM – Investors are advised to sell the security or hold alternative securities within
the sector. Stocks in this category are expected to underperform relative to their sector. The category also
represents stocks with unattractive forecast returns relative to alternative investments.
TENDER – The analyst is recommending that investors tender to a specific offering for the company’s stock.
RESEARCH COMMENT – An analyst comment about an issuer event that does not include a rating.
COVERAGE DROPPED – Haywood Securities will no longer cover the issuer. Haywood will provide notice to
clients whenever coverage of an issuer is discontinued. The termination of coverage will not occur unless clients
have been provided with advice relating to positions they may still hold, such as a recommendation to sell their
securities.
The above ratings are determined by the analyst at the time of publication. On occasion, total returns may fall
outside of the ranges due to market price movements and/or short term volatility. At the discretion of Haywood’s
Management, these deviations may be permitted after careful consideration.
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For further information on Haywood Securities’ research dissemination policies, please visit:
http://www.haywood.com/research_dissemination.asp
Financial Risk: High – The capital expenditure program in the current year or the next year of the forecast is not
fully funded but requires additional debt and/or equity financing. This categorization does not necessarily predict
whether the additional funds will be raised. Moderate – The capital expenditure program in the current year or the
next year is fully funded with cash flow and limited debt. Low – The capital expenditure program in the current
year or the next year is fully funded with cash flow and no new debt.
Political Risk: High – Properties are located in an area with limited petroleum industry activity or infrastructure.
An environment unfriendly to the industry makes obtaining permits to drill or produce hydrocarbons challenging.
Significant government or local opposition exists. Moderate – Properties are located in an area with minimal
petroleum industry activity or infrastructure. An environment friendly to the industry makes obtaining permits
relatively straightforward. All levels of government are considered indifferent to hydrocarbon activity. Low –
Properties are located in an area with established petroleum exploration and development activity. Oil and gas
Production Sharing Agreements or Exploration Permits are in hand. Government at all levels supports the sector.
Valuation Risk: High – The current valuation is at the high end of historic levels and/or at a premium to peers.
The valuation reflects continued production growth and/or continuing strong commodity prices or further
appreciation. Where applicable, the market capitalization exceeds the NAV by more than 30%. Moderate – The
current valuation is within historic ranges and generally consistent with peers. The valuation reflects reasonable
production growth and/or commodity price appreciation. Where applicable, the market capitalization exceeds the
NAV by 15% to 30%. Low – The current valuation is at the low end of historic ranges and/or at a discount to peer
valuations. The valuation reflects limited production growth and/or no commodity price appreciation. Where
applicable, the market capitalization exceeds the NAV by less than 15% or falls below the capitalization.
Disclaimers
Estimates and projections contained herein, whether or not our own, are based on assumptions that we believe to
be reasonable. The information presented, while obtained from sources we believe reliable, is checked but not
guaranteed against errors or omissions.
Haywood Securities Inc., its subsidiaries and their respective officers, directors, and employees may hold
positions in the securities mentioned and may purchase and/or sell them from time to time.
This report is neither a solicitation for the purchase of securities nor an offer of securities. Our ratings are intended
only for clients of Haywood Securities Inc. Haywood Securities (USA) Inc., and those of Haywood Securities
(UK) Limited and such clients are cautioned to consult the respective firm prior to purchasing or selling any
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