TriOil Resources: A Tale of Two Light Oil Plays

TriOil Resources holds an enviable position in 2 light oil plays in Alberta: the Cardium at Lochend and the Dunvegan at Kaybob. Both plays make-up a platform for solid growth in production and reserves in 2012 and beyond. The market recently sold the stock based on disappointing Q4 numbers and reserve numbers ignoring the impact of non-core dispositions last year. But I believe herein lies the opportunity because the market sold by looking backwards rather than a few months ahead into 2013.

While 2011 was not the greatest year in terms of stock price performance, it was a transformational year for the company which has finally unlocked the Cardium formation at Lochend with slick water completion. The learning exercise has been costly as the early rounds of gel oil fracks used in 2010 and early 2011 failed to produce attractive results. However, the days of subpar IP rates are now in the past!  TOL’s 7th Cardium well completed with slickwater fluids produced 1,320 boe/d (89% oil) over an extended 6 day period (657 boe/d for IP30).

trioil lochend cardium

Cardium Fairway at Lochend

At Lochend the company holds 57 net sections of land prospective for Cardium oil. IP30 rates range from 120-700 boe/d with the higher results occurring in the central and western parts of Lochend where wells payout in 1 year or less. The play gets deeper as you move further west and with increasing depth comes higher natural pressure resulting in better IP rates. TOL’s upside potential at Lochend resides in its attractive land base in the Central and Western part of the Cardium fairway where the bulk of the drilling program is ongoing. The company’s focus has moved away from the eastern edge except for a handful of non-operated wells. Continued success at Lochend adds significant upside value as more locations are added to the 70+ well inventory.

At Kaybob the company holds 31 net sections of land prospective for Dunvegan light oil. TOL announced this new high impact light oil resource play late last year and its first well achieved an IP30 rate of 818 boed (95% oil). Subsequent wells have averaged lower IP30 rates but still upwards of 350 boed. We should expect to see this variability in the initial production rate of the first 30 days since only a small number of wells have been drilled so far. Nevetheless, at Kaybob an IP30 rate of 300 boed pays out in 9 months and in 5 months at an IP30 rate of 500 boed using oil at $90 CAD.

Lochend and Kaybob are not only fueling rapid production growth, they are also contributing higher netbacks and a higher oil weighting. TOL entered 2012 with production 70% weighted to oil and expects to exit 88% weighted to oil. Netbacks have considerably improved from an average of $30/boe in 2011, to $40/boe in Q4 of 2011 to $45/boe in December of 2011! The company is also on track to double its corporate production from an average rate of 1,287 boed in 2011 to 2,400+ boed in 2012 on the back of an aggressive $100 million capex program.

TriOil Resources TOL.V 0.00 [N/A] also holds land at Tableland in Saskatchewan, Pouce Coupe and Sweeney in Northern Alberta which will not be discussed because the company is being built at Kaybob and Lochend. Furthermore, the growing Cardium and Dunvegan production base will give TOL the ability to dispose of non-core properties like Tableland in Saskatchewan which is on the table with a “for sale” sign. The disposition of Tableland will bolster a strong balance sheet since the company is well financed thanks to raising money in March at $3.55 a share.

Let’s put some numbers on valuation and growth; in our 2012 scenario, TOL will produce an average of 2,400 boed (82% oil), the mid-range in the company guidance and a record for annual average production.

BTI Price Deck

  • $85 Realized price per oil barrel
  • $2/mcf realized price for natural gas

The price deck used is relatively conservative since the company realized $92.75 per barrel in Q4. Our scenario results in a CFPS of ~$0.62 or about $33 million in cash flow which means that at $2.80 the company is currently trading at a 4.5x multiple. While this is not a rich valuation, the stock is in a much better shape than many of its peers. However,  the stock becomes severely undervalued moving into Q412 and into 2013. Q4 is not that far off, TriOil’s annualized cash flow for the quarter is at least 50% higher than this year’s projected cash flow. Subsequently, the company will be entering the year with 3,500 boed and will potentially average more than that for the year. Let’s keep it simple and assume the annual average production rate is 3,500 in 2013 (88% oil) ie simply replacing declines from that point on. Using the same price deck our scenario results in ~$1.00 of cash flow per share. Now apply a 4.5x multiple and we have a very nice upside at $4.50/share. The current NAV is $4.31 based on the last reserves report but I expect this number to rise higher on the back of significant reserve additions from this year’s drilling.

TriOil is on track for back to back record growth in production and cash flow in both 2012 and 2013. The company offers investors a concentrated exposure to Cardium oil at Lochend and Dunvegan oil at Kaybob. Well financed and with limited exposure to natural gas, investors don’t have to worry about natural gas gas prices this summer because they have an immaterial impact on the company’s cash flow. Nonetheless, if oil prices decide to migrate south for an extended period of time, the whole investment scenario falls into pieces.