Acumen Research Increases Target on RE

ROBERT COOPER, Acumen Capital Research (05/11/2010)
"Q1 results in line with expectations. RE Q1 results were essentially in line with our expectations. The company only managed 11 heavy oil wells in the quarter due to weather issues, which likely prevented a beat of our estimates. As they were, a higher oil mix offset higher cash costs and brought actual in line with our estimates (reported $0.22/sh CFPS fd vs. $0.24/sh estimate). Heavy oil production growth remains the near-term story with RE showing solid y/y and sequential growth while gas production continues to naturally decline due to lack of drilling.

Elmworth remains the focus for H2/10. As we have mentioned in previous reports, Elmworth remains the sizzle on the RE story. RE has yet to fully delineate the Montney and Nikanassin potential at Elmworth but has one successful well into the play to date. Offsetting competitor activity has been positive and suggests that RE lands are highly prospective. We expect one horizontal delineation well at Elmworth in Q4, which should go a long way to proving the prospectivity of the area and potentially re-rate the stock to a resource multiple.

All told, RE has increasing heavy oil production (that is increasingly as attractive as light oil) backstopping cash flow used to delineate a potentially massive resource play at Elmworth. We believe that this upside is not yet fully priced into the stock. Consequently, we have maintained our Buy rating but increase our target price to $6.00. This represents a target 2011e EV/boe/d of ~$48,000 and just 3.5x 2011e CF."

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