It’s been a rough year for Reliable Energy investors, between disappointing results in Montana and lowering their guidance for 2011 REL has been stuck in the lower levels of its trading range. However, the ship is turning and this Bakken light oil junior producer is finally on the right track following its Q3 report and its latest operational update: RELs daily oil production finally crossed the elusive 1,000 bopd threshold. I thought I would highlight several improving indicators such as production growth, financial health and land value for a company currently trading at attractive valuations.
Taking production above the 1,000 bopd mark is great news as the cash flow based on current oil prices will make it possible to deliver a similar capex program for 2012 potentially without tapping its credit line if oil prices remain solid next year. At 1,000 bopd per day with $90 CAD per barrel, REL will cash flow more than $2M per month which can fund about 15 gross HZ wells. Reliable Energy REL.V 0.00 [N/A] reported top quartile netbacks of $65 per barrel which is among the best in the industry.
‘For 2012, Reliable expects to commence operations in early January with drilling activity for the year anticipated to be along the same lines as 2011.’
The current debt to CF is 0.78:1 and in my opinion it will be decreasing in 2012 based on increasing cash flow fueled by organic growth. This is important because I consider the outstanding number of shares a weak point; at 237M you do not want to issue more paper in this kind of market. Furthermore, REL’s land base in Manitoba is growing in value as indicated by the recent land sale. This will increase the NAV of the company where it holds 90,000 net acres in the area, at least on paper for now, until the market turns and decides to award it a deserved premium. Remember that Manitoba is a development play not an exploration play.
‘During November, there was a significant Crown land sale in the Elkhorn, East Manson and Kirkella areas directly offsetting Reliable’s lands. Sale prices increased sharply over previous sales with the top price reaching in excess of $4,700 per hectare.’
Going forward, I believe management has a better idea on HZ type curves and will not repeat the same mistake of 2011 in??over-promising??and under delivering when it comes to guidance. My expectation is for a 2012 guidance that will be met. The Montana exploratory play remains a free wildcard at this price and the company is taking its first steps towards applying water flood next year.
When it comes to valuation, taking the 1,100 bopd (100% oil) production, 11M in debt, 236.5M shares outstanding and using a $100,000 valuation per bopd results roughly in $0.42 per share. The share price is currently trading at a significant discount and in hindsight the low 20s might be a good entry point. Of course, the market listens to Europe only these days so I wont be surprised if the share price remains subdued until this crisis is defused or the market decides otherwise.
What do you think of Reliable Energy?