In a March 27 research note, analyst Ian Macqueen reported that Eight Capital initiated coverage on Frontera Energy Corp. (FEC:TSX) with a Buy rating and CA$52.50 per share target price. In comparison, the stock is currently trading at around CA$36.11 per share.
About Frontera's overall prospects, Macqueen concluded, "Short term, we see good upside to the company share price as it executes on some of the 2018-2019 catalysts outlined. . .medium term, we believe that the company can mitigate declines in 2019 and 2020 by appraising the Guatiquia and Quifa properties."
Longer term though, the analyst added, Frontera "needs to establish new growth properties (production and reserves) that do not currently exist within the portfolio." Those could be or include the Block 192 production contract and/or a discovery in LLA-25 at Acorazado.
Macqueen outlined six possible value-adding catalysts for Frontera:
1. Upwardly revised reserves at Quifa and Guatiquia based on results from drilling in 2017. For instance, Macqueen indicated that an additional 10 million barrels of heavy oil reserves at Quifa would add a value to the stock of about CA$2.75 per share, and the same at Guatiquia would add about CA$3.50 per share. "Even reasonably small reserve additions would be immediately impactful to our model," he added. "We think that there is a good chance that Frontera will get positive revisions at year-end 2017."
2. A win in the arbitration with the Agencia Nacional de Hidrocarburos in Colombia over high-priced royalties at Corcel. A victory would mean Frontera could eliminate about $200 million in current liabilities.
3. A positive outcome from renegotiated ship-or-pay contracts regarding the Oleoducto Bicentenario de Colombia S.A.S. (OBC) pipeline. Mandatory renegotiations, anticipated in Q2/18, "could reduce or eliminate ~$100M per year in unused OBC capacity charges," Macqueen noted.
4. Favorable exploration results. In Q1/18, Frontera plans to drill on the Guatiquia Block with three rigs. In Q2/18, it will initiate drilling on the LLA-25 block, with the Acorazado-1 exploration well "testing a ~54 million barrel prospect," wrote Macqueen. "Although it is high risk, success at Acorazado could allow the company to offset declines until at least 2020."
5. Landing the 30-year contract to produce oil from Block 192 in Peru's Marañon Basin. The public bidding process for the contract is slated to start in late 2018. Frontera, which currently has a temporary service agreement to drill there, "sees significant potential on the block" and "feels that the company is well positioned to win the contract," Macqueen relayed.
6. Increased EBITDA capacity at Puerto Bahia. Following completion of proposed infrastructure, including a new dry dock and pipeline connection to the Refineria de Cartagena, Frontera could see an increase in earnings up to greater than $100 million per year in 2020 from $50 million today.
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Disclosures from Eight Capital, Frontera Energy Corp., Initiating Coverage, Mar. 27, 2018
Conflicts of Interest: Eight Capital has written procedures designed to identify and manage potential conflicts of interest that arise in connection with its research and other businesses. The compensation of each Research Analyst/Associate involved in the preparation of this research report is based competitively upon several criteria, including performance assessment criteria, the quality of research and the value of the services they provide to clients of Eight Capital. The Research Analyst compensation pool includes revenues from several sources, including sales, trading and investment banking. Research analysts and associates do not receive compensation based upon revenues from specific investment banking transactions.
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