AAV's Corporate Strategy: Shaken or Stirred?

CRISTINA LOPEZ, Macquarie Research (01/26/2011)
"Advantage's growth from its cornerstone Montney asset is well understood by the market; however, despite showing top-decile FD&A costs over the past two years, delivering above-average growth and maintaining one of the most attractive natural gas hedge books, AAV continues to trade at a discount to its intermediate gas-weighted, resource-play peer group. We believe that Advantage is looking at different strategies to potentially unlock upside in its valuation.

In unlocking this hidden upside, we believe Advantage could adopt one of the following strategies: 1) Split up the company and create a separate gas company focused on Glacier and oil company focused on the company's current, underexploited oil assets; 2) Reinstate a dividend; 3) Stall gas growth and focus solely on oil; 4) Grow the gas portfolio at a slower pace until gas prices recover and spend incremental capital on oil; and 5) Sell oil assets or sell Glacier.

Although nothing has been announced, we believe AAV's management team needs to look at potential strategies to improve its relative valuation. Of all the alternatives we explored, we believe the greatest upside is in a potential breakup of the company with the creation of a near-Montney pure play and a high-growth oil producer. . .an announcement of a change in strategic direction would create an attractive buying opportunity for investors. Advantage remains one of our top investment ideas in the Mid-Cap universe and we reiterate our Outperform rating."

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