Marquee Energy released its Q1 results last week reporting disappointing production volumes due to tie in delays at Michichi. The company reiterated its guidance for 2012 to average 3,100 boe/d and exit at 3,600 boe/d (67% liquids). Encouraging results from Michichi reveal an exploitation play in progress. The capex has been increased by $5 million without updating guidance which sets the company up to exceed its exit rate by the end of Q3.
The market expected production volumes to average more than 2,000 boe/d for Q1 so the reported 1,767 boe/d (46% liquids) was a bit of a letdown. The first 2 wells at Michichi that should have contributed to production took about 3.5 months to tie in. These delays are to be expected from a junior company drilling in a new area before the process is streamlined. New wells currently require 2-2.5 months to tie into third party infrastructure, an improvement but still looks like a lot of paperwork. The company is currently looking at a few options in order to reduce delays further.
On to the good stuff at Michichi where the first 4 wells added 740 boe/d of production. This comes out to 185 boe/d per well with a 54% liquids weighting. So far 5 horizontal wells have been successfully drilled and completed proving 3 productive zones: Detrital, Banff and Ellerslie. The play is not yet in development phase but it has exited the exploration phase as more acreage is proved with each new successful well. The team now understands the costs, drilling and geology of this play and is looking to add more land in the area. MQL will drill 3 new HZ wells in Q2 in addition to tieing in 5 completed wells. Marquee holds ~60 net sections of land (10 net sections added in Q1) which translates into a conservative unrisked drilling inventory of 120 net locations.
At Coutts, the company also increased its acreage by 6.5 net sections for a total land base of ~19 net sections. The first well was completed over the weekend so the next catalyst will be the IP30 rates. The company’s type curve calls for an IP30 rate of 70 boe/d but DeeThree’s Sunburst Hz well drilled not far from Marquee averaged 160 boe/d (69% liquids). In my opinion, the IP30 rate used by the company is conservative and makes for a nice upcoming surprise.
Revisiting the stock’s valuation, let’s use the following numbers for our scenario:
- 2013 Average production rate 3,600 boe/d (67% liquids)
- Average realized prices:
- Light oil price: $90 /bbl
- Heavy oil price: $60 /bbl
- NGL price: $60 /bbl
- Natural gas price: $2.25 /mcf
2013 is right around the corner, using the above price deck the company is trading at dirt cheap valuations. The average production rate is VERY conservative since it assumes no growth from the exit rate guidance of 2012 which most likely will be exceeded by the end of Q3. Using Marquee’s current stock price ($1.20), the company is trading at a cash flow multiple of 1.7x for $0.70 in CFPS. Slapping a 4.0x multiple sets a target price of of $2.80. Furthermore, the balance sheet should benefit from the dispositions of Weyburn and Ante Creek properties which are up for sale.
Clearly, the company is not raising market expectations and avoiding attention while they build confidence in their plays. In my opinion, Q3 will be a blockbuster for MQL as it will surprise the market with high production growth. Hopefully, Greece will be behind us by then (we’ll know next month) since the cat will be out of the bag and it will be time to get some recognition!