Marquee Energy: Undervalued Oil Junior with Strong Production Growth Ahead

Marquee Energy was born from the combination of SkyWest Energy and Marquee Petroleum. While it was a painful event for SkyWest shareholders, the new company should no longer carry the SkyWest Stigma. Lead by a completely new management team with veteran oilman Richard Thompson at the helm, this is a brand new story worth following in my opinion. Marquee is currently trading at a substantial discount compared to its peers even though it is one of a few oil weighted junior companies with strong production growth ahead.

First, let’s look at the achievements of this team so far followed by an analysis on the company’s production and cash flow. The new management team has grown undeveloped land by 174% from 35,000 acres in 2010 to 96,000 acres in 2011. In 2012, the current undeveloped land base stands around 113,000 net acres distributed mainly throughout east central Alberta. Current production was recently reported at 2,570 boe/d (59% oil & liquids) which is up from 1,655 boe/d (41% oil & liquids) in Q4 of 2011. The current figure excludes the wells that have been drilled in Q411 and Q112 which are expected to be tied and on production during Q212. For 2012, MQL is guiding for an average production of 3,100 boe/d (60% oil & liquids) which is double 2010’s average production of 1,555 boe/d. For 2013, my personal estimate is for an annual production average of 4,000 boe/d with more than 66% in oil & liquids. Let’s not look too far ahead and focus on 2012 for now.

marquee energy
Marquee Energy 

Marquee Energy  MQL.V 1.08 [+0.10] is exhibiting enviable growth rates for a junior yet its share price is languishing. I have been investing for years in the oil and gas sector so these market hiccups are part of the baggage. As long as the world doesn’t end, we all know the era of cheap oil is over and for years to come oil and gas will still have a dominant position in the energy landscape.  Is the current share price a buying opportunity? Let’s take a quick look at some metrics to find the answer. I personally enjoy playing with numbers and estimates mainly because I get to use what I feel like are conservative numbers. First let’s value the company using $/flowing barrel metrics. For 3,100 boe/d weighted 60% to liquids and 52.7M shares outstanding, we will use the following:

  • $70,000/boe for light oil
  • $30,000/boe for heavy oil
  • $10,000/boe for natural gas

If this is not conservative pricing, I don’t know what is. Light oil transactions have averaged more than $100k per flowing barrel in the last 2 years. Manitok announced today that it has sold its heavy oil production for $40,000/boe and MQL paid $42k/boe for its latest heavy oil acquisition so $30k is relatively conservative. As for natural gas, $10,000/boe might not be too rich as no one is giving it out for free just yet! The above metrics result in $2.35/share for MQL. Let’s look at the cash flow per share for 2012 using the following price deck:

  • $90 Edmonton Par (Light Oil)
  • $75 Western Canadian Select (Heavy Oil)
  • $2    AECO Spot

MQL is guiding for $0.66/share in cash flow but our model produces $0.59/share. The discrepancy is normal given the different price decks used as well as not taking into account any hedges that might exit. Using a price of $1.30/share, the company is trading at less than 2x P/CF and at 2.2x P/CF multiple for $0.66 CF/Share and $0.59 CFPS respectively. At $0.59 CFPS, the share price ranges between $2.07/share and $2.36/share using a 3.5x to 4x CF multiple. This is obviously very cheap for a company with more than 60% of its 2012 capital program directed to low cost, light oil drilling opportunities in Eastern Alberta where wells payout in 9.0 months or less!

Finally, the company’s debt to cash flow will be at 1.02 meaning no financing will be needed anytime soon unless further acquisitions materialize. However, in that regard Marquee will be selling off non-core assets which will most likely involve Weyburn in Saskatchewan and Ante Creek in WC Alberta. The East Central assets might not have sex appeal like the Bakken but they will be the workhorse of the company for fast light oil growth increasing cash flow and providing meaningful per share growth.

What do YOU think of Marquee Energy?

Disclaimer: I have a position in Marquee Energy. This article is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment, please do your own due diligence before taking an investment decision. 

13 comments to Marquee Energy: Undervalued Oil Junior with Strong Production Growth Ahead

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