Have you ever wondered which Canadian junior oil stock in the Western Canadian Sedimentary Basin should top your buy/watch list? The answer is simple: Pinecrest Energy (TSXV-PRY). PRY is one of a few light oil stocks (99% oil) that enjoys a healthy balance sheet, top tier netbacks, high growth and a lot of running room in a proven low risk light oil play.
In 2011, Pinecrest averaged 1,347 bopd (99% oil) and while there is no official guidance for 2012′s average production (except for the exit rate of 5,000 bopd), my estimates point to at least 4,000 bopd (99% oil) for the year.
That’s almost 200% in growth.
Using a realized oil price of $75 per barrel Edmonton Par for 2012, the company will generate around $72M in cash flow. With an estimated debt of ~$83M exiting the year, the Debt to Cf ratio ends up slightly above 1.1x or lower if average production ends up a couple hundred barrels above 4,000 or if realized oil prices end up higher.
For 2013, I expect a 50% increase in average annual production to around 6,000 bopd, unless of course Europe totally ruins the global economy forcing energy companies to curtail spending.
Pure Slave Point Oil Player
Pinecrest PRY.V 0.145 [-0.005] holds an enviable position in one of Canada’s hottest light oil plays, the Slave Point formation oil play in Northern Alberta. The company assembled a dominant position of 250 net sections of land which translates into a net drilling inventory ranging between 235-435 locations depending on drilling 4 wells/sections or down spacing to 8 wells per section. At the low end of the estimate, Pinecrest has about 10 years of drilling inventory based on its 2012 program of 29 wells!
In Q1/12, Pinecrest reported the highest netback (profit per barrel) across the Canadian junior universe realizing $71.60/boe, before hedging losses or $69.51/boe after realized hedging losses.
Obviously, the 99% oil weighting while a boon in a strong oil price environment can quickly turn to a weakness decimating the share price if oil prices collapsed since the company is a play on a single commodity. But with global oil demand on the rise and the fact that its breakeven price is one of the lowest ensures it will survive the volatility we’re seeing right now and prosper once the markets return.
Size of the Prize
Pinecrest’s 235 net drilling locations contain an estimated 580 million barrels of Discovered Oil Initially In Place of which 67.5 million barrels are considered recoverable representing 40% of the Slave Point land base (upside no 1). But this is only based on a 13% recovery factor using primary recovery based on a drilling density of 4 wells per section. There is a lot of upside to primary recovery if one considers a drilling density of 8 wells per section (upside no 2). Let’s not forget the company began implementing waterflood which can potentially increase recoveries by 50% to 100% over primary recovery (upside no 3).
Best in Class Team
Pinecrest is led by Wade Becker, president and CEO, which was one of the original founders of Crescent Point Group. The team is respected by the market which means the stock is among a few that always trades at premium valuation to the peer average group. But more importantly, it means this is the first stock risk money enters when sentiment turns positive on oil.
The team has every reason to succeed; they have a history of value creation and own 25% of the shares on a fully diluted basis.
As of Q1 of 2012, the company had $18.5M withdrawn on its $125 million line of credit which provides the company with a lot of financial flexibility. If we were in a strong oil price environment, I would have expected the company to up its guidance for the year and increase its spending. The decision is easily justified when you have the highest netbacks in the industry.
Finally, in a market where drilling and servicing costs are falling (thanks to low NG prices and lower oil prices), companies with meaningful cash flow such as PRY benefit as they continue to grow production and reserves for a lower cost. Growth in reserves has not been discussed at all, suffice to say it will be significant as more and more locations get booked. The premium valuation is certainly justified and while the share price is not immune to fear and market volatility, PRY remains among the best bets on oil among Canadian oil and gas producers for the long run.
What do you think of PRY?