Renegade Petroleum (TSXV-RPL) is one of a few junior oil producers that deserve to be in the spotlight for its 97% light oil weighted production, high production growth, top tier netbacks, balance sheet strength and a significant running room thanks to an asset base providing more than 700 net drilling locations.
The company upped its guidance this year 10% back in May to 4,400 boed (97% oil) for its annual average production which is 76% above 2011 level of 2,491 boed (96% oil). That’s an 84% per share production growth since inception. The company is on track to exit 2012 at 5,200+ boed.
Diversified Asset Base
Renegade’s drilling inventory is mainly distributed in 3 resource plays:
The Viking oil play in Saskatchewan: With 26.5 net sections of land, the Viking provides a drilling inventory of 314 net sections assuming 16 wells/section spacing. The Viking is boring with IP30 rates of ~50 boed but it is a proven, low risk development resource play. The upside here lies in the potential for waterflood because it increases the recovery factors significantly for little cost. Through waterflood a company can harvest an extra 1 million barrels per section for a cost of $10 per barrel or less, pretty cheap barrels if you ask me. Water injection is expected to start in late 2012.
The Mississipian oil play in South East Saskatchewan: Renegade’s 65 net sections of land translate into 152 net locations. The company’s primary targets are the Souris Valley and the Frobisher formations which are charged with 40° API oil. RPL has drilled 4 dual leg Frobisher/Souris Valley wells in Q1/12 which produced IP30 rates of 130boed exceeding its budgeted type curve of 85 boed. RPL optimized one of the wells which ended up producing 160 boed. So with 21 net remaining development wells planned for 2012, the company may well revise its guidance upwards, for the second time this year, if well results continue mirroring optimization efforts.
The Slave Point oil play in Northern Alberta: Renegade established a 3rd core area by assembling 58 net sections at Joan and Senex. While this translates into at least 200 potential net drilling locations, there’s no HZ well drilling history in the area. The first HZ well is expected to spud in Q3/12. Needless to say, initial results will be a major catalyst for the stock as vertical producers show comparable rates to analog pools at Sawn Lake, Otter and Red Earth (IP30 rates sometimes exceed 400 bopd at Sawn Lake). Waterflood would naturally follow by the end of 2013.
Aside from its 3 core areas, RPL owns 5.3 net sections of land in the Spearfish oil play of Manitoba and a few net sections prospective for Bakken oil in Saskatchewan (9 net sections) and North Dakota (39 net sections for exploration).
Top Quartile Netbacks
The company reported Q1 operating netbacks of $53.39 based on a realized oil price of $83.51 per barrel. There aren’t many oil and gas producers that even come close. Even with lower Edmonton Par oil prices, the figure will remain in the top quartile, at least $43/barrel according to my estimates using $75 oil which is conservative given they have 1,500 barrels hedged at $100.23 unless oil prices decide to wipe the floor for the rest of the year.
Exiting 2012, Renegade will only be 64% drawn on its $125M credit line with a net debt of $80 million. The company’s cash flow will ultimately depend on the realized price of light oil and it will most likely result in a debt to CF around 1.15x @$80 oil with an average production of 4,450 boed (97% oil).
Renegade RPL.V 2.00 [+0.06] enjoys a healthy balance sheet thanks to raising $50 million at $4.00 per share and $4.80 in flow through financing. It’s $130 million budget for this year is certainly putting the money to good use. The deal was 3x oversubscribed which is an indication RPL’s share price will soar when the risk trade is back on.
The summer doldrums often turn out to be an excellent opportunity to pick up quality oil stocks on sale. Of course a European meltdown would probably take the share price to single digit territory, an even better buying opportunity if you ask me. In the Canadian junior oil sector, there are only a handful of companies worthy of mention, Renegade Petroleum is one of the few for all the reasons mentioned above.
What do you think of RPL?