Renegade Petroleum: Standing Out from the Junior Crowd

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.

High Growth

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.

renegade slave point

The Slave Point will be the engine of growth in 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.

oil netbacks

Top Tier Netbacks – click to enlarge

Financial Flexibility

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.

Conclusion

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?

22 comments to Renegade Petroleum: Standing Out from the Junior Crowd

  • Lee Roth

    Renegade has an enterprise value almost 300 million $ currently which gives a 70,000 $/boepd. Ok it has 97% oil and liquids but this valuation is NOT cheap.

    I prefer TOL.V with 80% oil and liquids that will grow to 88% by year end according to the company .
    TriOil trade at only 30,000 $/boepd currently. To me , this is a bargain.

    • Mich

      TOL is definitely a better bargain on $/boe metrics.

      TOL is trading at $47k/boe
      RPL is trading at $66k/boe

      However, TOL does not have the same running room RPL has and RPL’s resource plays (SP and Mississippian) have more “Sex appeal” let’s say…

      In the end, they’ll both do fine,

      Mich

      • I’m interested in the math. Perhaps you could do a post or two explaining these terms and then put it on your side bar. Explain also why they are important for evaluation. Here, your math seems to differ from Lee’s. Is there is a difference between, $/boepd and $/boe ? What are we actually doing here? Are we dividing the Market Capital by barrels per day?

        • Mich

          Peter,

          We are using the same formula EV/prod where EV=MC+debt-cash
          The difference is the amount of debt used and the prod numbers used.

          Lee bases his calculation on a snapshot of “the moment” but I used the annual prod average. This is why we arrive at different numbers.

          See below,

  • Lee Roth

    TOL.V has a production of 2500 boepd as of May 2012 according to the latest pr AND the company AND the presentation.

    The current enterprise value of TOL is less than 80 million $ as it has zero long term debt.

    “The Company’s balance sheet is very healthy, with $15.6 million positive working capital at the end of the
    first quarter of 2012 and $50 million in undrawn bank lines.”

    This gives a 31,000 $/boepd valuation.

    • Mich

      Lee,

      TriOil will average 2,400 boepd this year and will exit with $33M in debt. (review presentation to see where I got my numbers)

      You like to use a “now” snapshot for your calculations, I like an overview for the whole year and I usually look into 2013 as well when I run my scenarios. Hence, the differences in numbers.

  • Lee Roth

    In terms of the resources base, TOL is in the heart of Cardium as the results from the wells prove.

  • Lee Roth

    Mich,

    If you want to calculate the debt at the end of the year ($33 M) then you should also use the EXIT production in Q4 2012 which is around 3500 boepd with 88% oil (not 80% which is now)!

    The result is 31,000 $/boepd again. This debt will be used to boost the production higher so you must use both sides of the coin if you want to be unbiased and correct.

    By the way few weeks ago when you were “promoting” XDC.TO that you own, you were evaluating it CURRENTLY by using ONLY the speculative and rather increased cash flow of Q4 2012 ….just saying….

    Cheers !

    • I think the friendly back and forth is useful for readers. There are often very subjective factors that go into calculating what appears to be objective valuations. Subtracting debt from year end and average production instead of exit production would be “conservative” but subjective.

      I think that choosing flowing barrels vs. Net Present Value is also a subjective decision. I’ve been trying to work with NPV not cost per flowing barrel–but comparing one company to another is a bit difficult (1) because not everyone offers an NPV in their presentations and (2) even if they did, there are likely multiple ways to calculate it. Should one go with NPV, NPV-5, NPV-10? Obviously -10 is more “conservative”. If you are a hyperinflationista like myself, then NPV is probably quite adequate.

      Also I want to react to Mich’s EV=MC+debt-cash. This seems pretty subjective too. Presumably the market has already priced debt and cash into the picture in Market capital. I think that this could lead to a double calculation and that the number becomes far too rosey or too pessimistic. Again, what appears to be a subjective valuation is really somewhat subjective–especially when comparing one company with another: one company’s debt has been over compensated by the market (PBN); another’s company’s debt discounted by the market (CPG). Furthermore, the terms of the debt makes a difference–if a bank loan the debt could cost half of what junk debentures cost, affecting cash flow.

      All this said, the cost per flowing barrel can be a quick indicator of value. Other factors play a roll and I assume when Mich says that Renegade has seven times the life of TOL, he’s referring to proven and probable NAV–or at very least NPV based on known drilling locations multiplied by presupposed netback, or the like. What do you mean Mich?

      In the end, however, the best time to buy is in markets like these. I have doubled down on PCE, MQL, and HYX. I established a small position on PXL (@.40 but hoping to add more on weakness); I’ve swapped my shares of PBN for PBG at price differential of $1.20 (it is now .79) and PBG has now announced that is ownership of PBN equals 1.08 shares of PBN/share of PBG. Thanks guys.

      • By the way, I realize that EV=MC+debt-cash is a standard measure. The subjective aspect is the MC, which may or may not take into consideration cash and debt. Perhaps my question should really be: Why does one uses EV instead of MC in calculating price per flowing barrel?

        • Mich

          MC = number of shares * price.
          Think of EV as a theoretical take over value “NOW”. So if someone steps up, buys all the shares at $X, he would have to pay extra for any outstanding debt or pocket any cash so he ends up paying more or less than the MC.

          Hope this helps!

      • Mich

        Peter, you bring up a great point with subjectivity aspect of metrics. Each “tool” you use merely returns a piece of information, there are no absolutes. You just have to put together the info and decide if there’s a case for it or not. How many companies got acquired below the NAV? That’s all we need as a proof there are no absolutes!

        There are many factors to consider like you said. In regards to the 7x running room, I was pointing out the drilling inventory: ~700 for RPL and ~100 for TOL.

        Your doubling down will payoff come January :)
        Good move on PXL, esp if WCS oil prices hold above $70!

        Cheers,

    • Mich

      Lee, same logic applies with average annual production, this is the debt required to achieve those numbers. No matter which approach you use, the result is relatively the same for comparison purposes.

      Furthermore, I do not “promote” stocks on this site, I write about those that are on my watch list or that I own so that we can discuss them. I do not own every stock I write about it.

      The future CF that I used was part of my projection for 2013 and not a short term estimate for 2012 like I did here for comparison purposes. There are many tools to use when building your case for investing or not, to each his own.

      Cheers,

  • CashIsKing

    I have conducted my DD on both TOL and RPL and I prefer the latter over the former at current prices. Put aside those EV/production, EV/CF, EV/2P and EV/NAV for a moment, because I always start with Project and People when analyzing a company.

    First, TOL’s 2 plays (Lochend and Kaybob)are riskier than those of RPL.
    Second, TOL’s management has less skin in the game than RPL. (8% vs 12.4%)
    Third, TOL’s management has a record less prominent than RPL.
    Last, Although TOL’s 70% oil and liquid (Q1)is not bad at all, its exit 88% oil and liquid is only a guide (there is a risk that that guide may not materialize, as it has happened to many junior companies,such as MQL)while RPL already has that % as high as 97%.

    My 2 cents: it is better to invest in a good company at a reasonable price than in a so-so company at cheap price.

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  • Greg

    I don’t get it. It seems too good to be true with Renegade. How can their share price be down here?! Can someone explain why it’s SO wildly undervalued? Is the market just that dumb and skittish? There has got to be something else, certainly anyone in the industry on the Prairies would be putting all their spare income into this company, especially at these prices?!

    What am I missing?! Someone on the executive team about to be charged with a crime? Are their field receipt reports total lies? What is it?

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