Action Notes - Investor Village

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Action Notes
January 21, 2014
1 of 61
Equity Research
RATING/TARGET/ESTIMATE CHANGES
Choice Properties REIT (CHP.UN-T) C$10.50
HOLD;Target: C$11.50 
Attractive Yield with Future Upside from Excess Land
...... 3
Mullen Group Ltd. (MTL-T) C$28.71
HOLD  (Unchanged);Target: C$29.00  (Prior: C$28.00)
2014 Capex as Expected; Good Leading Indicator
...... 7
Paladin Energy Ltd. (PDN-T) C$0.60
HOLD  (Unchanged);Target: C$0.70  (Prior: C$0.60)
Langer Heinrich JV - A Positive Step Towards Reducing Debt
.... 11
Pan American Silver Corp. (PAAS-Q, PAA-T) US$12.89
HOLD  (Unchanged);Target: US$14.00  (Unchanged)
2014 Guidance in Line
.... 15
Potash Corp. of Saskatchewan Inc. (POT-N, POT-T) US$34.17
HOLD  (Unchanged);Target: US$33.00  (Unchanged)
Uralkali Announces H1/14 Chinese Potash Contract
.... 18
Raging River Exploration Inc. (RRX-T) C$7.13
BUY  (Unchanged);Target: C$9.00  (Prior: C$7.50)
Material Reserves Increase and Production Beat
.... 23
GENERAL COMPANY NOTES
Enerplus Corp. (ERF-T, ERF-N) C$20.35
BUY  (Unchanged);Target: C$23.00  (Unchanged)
Duvernay: Potential for $0.5 Billion of Shareholder Upside
.... 28
Pacific Rubiales Energy Corp. (PRE-T) C$17.85
BUY  (Unchanged);Target: C$26.00  (Unchanged)
On the Road with PRE; Conference Call Takeaways
.... 34
INDUSTRY NOTES
Energy Producers - Internationals
International E&P Sector Outlook for 2014
.... 39
INTRADAY NOTES (published January 20, 2014)
BNK Petroleum Inc. (BKX-T) C$1.56
SPEC. BUY  (Unchanged);Target: C$3.00  (Prior: C$2.75)
Neutral Market Reaction to Significantly Reduced Costs
Please see the final pages of this document for important disclosure information.
.... 45
Action Notes
January 21, 2014
Equity Research
2 of 61
Sprott Inc. (SII-T) C$3.01
HOLD  (Unchanged);Target: C$3.25  (Unchanged)
Updated Performance Fees and AUM for 2013 Year-End
.... 51
TransGlobe Energy Corp. (TGL-T, TGL-N) C$9.09
BUY  (Unchanged);Target: C$12.00  (Prior: C$13.00)
Re-Visiting Production Forecasts
.... 55
Real Estate
Recommendation:
HOLD
Risk:
MEDIUM
12-Month Target Price:
C$11.50
12-Month Distribution:
C$0.65
12-Month Total Return:
15.7%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
Mkt Cap (basic)($mm)
EV ($mm)
Current Distribution per Unit
Current Distribution Yield
Avg. Daily Trading Vol. (3M-All Exch)
$10.50
$9.50-$10.97
$3,885.0
$3,885.0
$7,337.2
$0.65
6.2%
111950
Financial Data (C$)
Fiscal Y-E
Units O/S (f.d.)(mm)
Units O/S (basic)(mm)
Float Units (mm)
Net Debt/Tot Cap
Debt/Gross BV (%)
NAVPU
December
370.0
370.0
25.4
48.6%
48.3%
$11.00
Estimates (C$)
Year
EBITDA ($mm)
DPU
FFO/Shr
AFFO/Shr
2012A
-----
2013E
225.5
0.32
0.44
0.36
2014E
488.4
0.65
0.90
0.73
2015E
517.0
0.65
0.91
0.74
FFO/Shr Quarterly Estimates (C$)
Year
Q1
Q2
Q3
Q4
2012A
-----
2013E
--0.21
0.22
2014E
0.22
0.22
0.23
0.23
2015E
0.22
0.23
0.23
0.23
2013E
32.5x
23.9x
29.2x
3.1%
2014E
15.0x
11.7x
14.4x
6.2%
2015E
14.2x
11.5x
14.2x
6.2%
Valuations
Year
EV/EBITDA
P/FFO
P/AFFO
Trust Yield
2012A
-----
Notes:2013 results reflect the period after the July IPO.
All figures in C$, unless otherwise specified.
Please see the final pages of
this document for important
disclosure information.
Action Notes
January 21, 2014
Equity Research
Sam Damiani, CFA
Derrick Lau, CPA, CA, CBV (Assoc)
3 of 61
Choice Properties REIT
(CHP.UN-T) C$10.50
Attractive Yield with Future Upside from Excess Land
Event
We are initiating coverage of Choice Properties REIT with a HOLD rating
and $11.50 target price.
Choice is the real estate spin-off from Loblaw Companies Ltd. (L-T, Loblaw).
The real estate was acquired and developed over several decades and, in our
view, represents a unique opportunity to invest in a large and diverse portfolio
of well located properties, backed by attractive long-term leases. In addition to
being Choice’s largest tenant and majority owner, Loblaw will serve as both a
major lender and partner in the REIT’s growth. Loblaw and George Weston
Limited continue to own 87% of the REIT on a combined basis.
The investment grade credit and industry-leading position of Loblaw, and the
13-year overall average lease duration, should bring strong stability to
Choice’s cash distribution. However, we believe that Choice’s ability to grow
per unit AFFO and NAV is relatively limited compared to most of its peers.
We anticipate that development/intensification opportunities have the
potential to be more meaningful drivers of per-unit AFFO and NAV growth
than new property acquisitions.
Details
At 36.2 million square feet, Choice’s portfolio is second in size to only
RioCan REIT among all Canadian-listed companies/REITs focused on retail
properties. The properties are well dispersed nationally, with Ontario, Quebec,
and Alberta representing 43%, 18%, and 13%, respectively, of forecast NOI
for the IPO portfolio.
Investment Thesis Highlights
Stability in Initial Property Portfolio: We believe that Choice will deliver
stable cash flows, primarily resulting from a 14-year weighted-average
remaining term on Loblaw leases, which contribute 93% of total NOI.
Company Profile
Choice Properties REIT was created in July
2013 with a focus on the retail sector,
specifically standalone grocery properties and
grocery-anchored properties primarily leased
to Loblaw. Following its first post-IPO
acquisition in October 2013, Choice currently
owns a portfolio of 433 properties comprising
36.2 million sf across Canada.
CHP.UN-T: Price
11.0
11.0
10.8
10.8
10.6
10.6
10.4
10.4
10.2
10.2
10.0
10.0
9.8
9.8
Jul
Sep Oct
2013
Nov
Dec
Feb
2014
January 21, 2014
Equity Research
Action Notes
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Exhibit 1. Portfolio Breakdown
Forecast NOI by Property Type
Forecast NOI by Province
MB, 2.5%
SK, 5.1%
ON, 43.2%
AB, 13.1%
Forecast NOI by Loblaw Store Format
Retail with
Loblaw and
Third Party
Tenants,
35.5%
Conventional,
44.5%
BC, 7.7%
Series 2
Stand-alone
stores,
54.0%
Series1
NL, 1.7%
Retail
without
Loblaw
Tenancy,
0.5%
PEI, 0.4%
NS, 4.6%
NB, 3.9%
QC, 17.8%
Discount,
55.5%
Warehouse,
7.9%
Office, 2.1%
Property Count
BC
AB
SK
MB
ON
QC
NB
NS
NL
PEI
Total
Retail
Warehouse
Office
15
1
0
16
45
1
0
46
11
1
0
12
9
0
0
9
170
1
1
172
100
1
0
101
25
3
0
28
37
0
0
37
8
1
0
9
3
0
0
3
423
9
1
433
Note: NOI breakdown based on management’s forecast.
Source: Company reports, TD Securities Inc.
Exhibit 2. IPO Portfolio Lease Expiration Schedule
Expiring GLA by Year
14.0%
5
12.0%
4
3
8.0%
6.0%
2
4.0%
% of total GLA
million sf
10.0%
1
2.0%
0.0%
Third Party
Loblaw
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
0
% of GLA Expiring
Sizeable Dedicated Acquisition Pipeline: Following the REIT’s first post-IPO acquisition in October 2013,
Loblaw’s retained properties now total an estimated 11 million square feet. We believe that this represents a
January 21, 2014
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Action Notes
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large acquisition pipeline with the potential to increase the REIT’s asset base over time by
approximately 35% (based on our value estimate of $2.5–$3.0 billion).
Exhibit 3. Loblaw Retained Real Estate
IPO
October 2013
Acquisition
Today
Choice
35.3
0.9
36.2
Loblaw Retained Portfolio
12.0
-0.9
11.1
Total
47.3
47.3
% Real Estate Retained by Loblaw:
25%
23%
GLA (mm sf)
Number of properties
Choice
425
9
433 (1)
Loblaw Retained Portfolio
163
-9
154
Total
588
We estimate that
this 11 million
square feet of
remaining real
estate represents a
potential future
acquisition worth
between $2.5 and
$3.0 billion.
587
1
Choice’s property count increased by eight to 433 since the acquisition and included a portion of a property already owned.
Large Size May Limit Per-Unit Growth: Despite the pipeline’s large size, we believe that the REIT will be
challenged in terms of delivering meaningful AFFO accretion through acquisitions given the following: 1)
Choice’s already-large size (more than $7 billion in assets); and 2) our view of expected cap rates. We believe
that development/intensification opportunities have the potential to drive greater per-unit AFFO and
NAV growth over time for the REIT.
Development and Intensification Opportunities: Management has identified at least 3.5 million square feet
of potential GLA that could be added at-grade through expansions on underutilized land across the REIT’s
existing properties. In addition, we believe that numerous properties within the REIT’s portfolio could support
further intensification through multi-storey development or re-development. In our view, these opportunities
could enhance the value of the portfolio and increase mid- to longer-term cash flow and net asset value.
Debt Refinancing Could Pose Headwind to AFFO Growth: Much of the REIT’s debt consists of transfer
notes from Loblaw which are priced below-market, given the rates were set prior to the bond market sell-off
this past spring. Based on today’s market rates, the ongoing refinancing of these transfer notes represents
approximately $0.01/unit of increased interest expense for each of the next several years.
Outlook
Our $11.00/unit NAV estimate sits above most other Street estimates, which average $10.33/unit (excluding
one outlier at $12.00/unit). Our calculation includes estimated value related to what we believe is under-market
pricing that Choice pays to Loblaw as it builds out additional space on its existing lands.
Our forecast calls for highly stable but relatively slowly growing FFO and AFFO. Our AFFO/unit estimates
for 2014 and 2015 are $0.73 and $0.74, respectively. We believe that the cash distribution will remain at
$0.65/unit annualized, with the expected AFFO payout ratio falling to 88% in 2015.
Our forecast reflects modest same-property NOI growth, contributions from acquisitions and property
developments, partially offset by higher interest expense on refinanced debt. Our model assumptions include:

Same-property NOI growth averaging 0.5% for the next two years, steadily rising to almost 2% five years
in the future;

$350 million in acquisitions at a 6.4% average cap rate (assumed pricing for Loblaw properties) in each
of 2014 and 2015; and
January 21, 2014
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Action Notes

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New debt pricing at 4% initially, rising to 4.7% by the end of 2015.
Valuation
Choice currently trades at 14.4x/14.2x our 2014/2015 P/AFFO estimates. This is similar to the average of its
closest peers, CT REIT, Crombie, and Calloway, but 9% below the overall peer group average for 2014 and
8% below the average for 2015 at 15.8x and 15.4x, respectively.
Exhibit 4. Trading Comparables
Name
Symbol
Current
Price
Mkt Cap
(mm)
Yield
P/
Payout
on '14E AFFO
'13E
AFFO
P/
AFFO
'14E
P/
AFFO
'15E
NAV
P/NAV
NAV
Cap
Rate
ND /
ND /
Implied Gross Gross
AV
AV
Cap
(incl.
(excl.
Rate
Conv.) Conv.)
Mid- to Larger-Cap Canadian Shopping Centre REITs and Corps
RioCan REIT
REI-UN
$24.80
7,509
5.7%
97%
17.8x
17.0x
16.4x
$24.10
103%
6.1%
6.0%
45%
CHP-UN
$10.50
3,885
6.2%
89%
nmf
14.4x
14.2x
$11.00
95%
6.2%
6.3%
46%
46%
FCR
$17.45
3,633
4.8%
91%
20.3x
19.0x
18.2x
$18.60
94%
5.8%
6.0%
45%
48%
First Capital Realty Inc.
45%
Calloway REIT
CWT-UN
$24.95
3,338
6.2%
87%
15.0x
14.0x
13.6x
$28.50
88%
6.1%
6.6%
43%
44%
CT REIT
CRT-UN
$11.13
1,999
5.8%
92%
n/a
15.8x
n/a
$10.85
103%
n/a
n/a
48%
48%
Crombie REIT
CRR-UN
$13.40
$13.30
1,639
6.6%
96%
14.6x
14.4x
14.4x
101%
6.7%
6.7%
54%
56%
Total/Average
22,003
5.9%
92%
16.9x
15.8x
15.4x
97%
6.2%
6.3%
47%
48%
Total/Average (CHP, CRT, CWT, CRR)
10,861
6.2%
91%
14.8x
14.6x
14.1x
97%
6.3%
6.5%
48%
48%
Source: TD Securities Inc. (CRR.UN, CWT.UN, FCR, REI.UN, CHP.UN), First Call & SNL Financial & CT REIT IPO forecast for CT REIT
Justification of Target Price
Our $11.50 target price is based on a 15.5x–16x 2015E AFFO multiple which is largely in line with where the
overall peer group average is currently trading. The target P/AFFO multiple is near the lower range of those
that we use for our commercial properties REIT coverage universe. Our target multiple tries to reflect Choice’s
shorter operating history, our view of its relatively limited ability to grow per unit AFFO and NAV, high
tenant concentration, and controlling interest held by Loblaw. This is partially offset by what we view as a
solid anchor tenant in Loblaw, a large national portfolio, a sizeable development pipeline, and an experienced
management team.
Key Risks to Target Price
Company-specific risks include the following: 1) tenant concentration risk to Loblaw; 2) 87% control by
Loblaw and George Weston of the REIT, combined; 3) a material change in relationship between Choice and
Loblaw could result in a re-valuation of the units; 4) exposure to the grocer, general merchandise and
drugstores; and 5) potential higher interest costs while refinancing debt (approximately 20% of total debt
matures through 2016).
Other key current risks include the following: general economic conditions (including, but not limited to,
interest rates and unemployment levels); local real estate markets; competitive supply; demand swings;
potential inability to lease up properties; general tenant credit risk; loss of key management personnel; and
potential for new unfavourable tax legislations that either directly affect trusts and/or increase the
attractiveness of common unit distributions.
TD Investment Conclusion
We are initiating coverage of Choice Properties REIT with a HOLD rating and $11.50 target price.
Oil & Gas Services
Recommendation:
HOLD
Unchanged
Risk:
C$29.00
C$28.00
Prior:
12-Month Dividend:
C$1.20
5.2%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
EV ($mm)
Current Dividend
Dividend Yield
$28.71
$20.01-$28.71
$2,707.4
$2,592.5
$2,906.1
$1.20
4.2%
238392
Financial Data (C$)
Fiscal Y-E
Shares O/S (f.d.)(mm)
Shares O/S (basic)(mm)
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
December
94.3
90.3
89.2
$313.6
27.5%
Estimates (C$)
Year
Sales ($mm)
Sales (old)($mm)
EBITDA ($mm)
EBITDA (old)($mm)
EPS (f.d.)
EPS (f.d.)(old)
2012A 2013E 2014E 2015E
1,427.6 1,434.1 1,528.4 1,592.9
-- 1,434.1 1,528.4 1,584.3
298.0
308.8
331.6
354.1
-308.8
331.6
351.6
1.58
1.72
1.75
1.87
-1.72
1.75
1.83
EPS (f.d.) Quarterly Estimates (C$)
2012A
0.67
0.09
0.49
0.34
2013E
0.49
0.30
0.56
0.39
2014E
0.58
0.22
0.46
0.49
2015E
0.62
0.25
0.48
0.52
2013E
16.7x
9.4x
2014E
16.4x
8.8x
2015E
15.4x
8.2x
2014E
92.50
4.00
2015E
$90.00
$4.00
Valuations
Year
P/E (f.d.)
Est. EV/EBITDA
2012A
18.2x
7.3x
Supplemental Data
Year
WTI US$/bbl
NYMEX US$/mcf
January 21, 2014
Equity Research
Scott Treadwell, P. Eng.
Aaron Sherlock (Associate)
7 of 61
HIGH
Year
Q1
Q2
Q3
Q4
Action Notes
2012A
94.14
2.75
2013E
98.50
3.70
Mullen Group Ltd.
(MTL-T) C$28.71
2014 Capex as Expected; Good Leading Indicator
Event
Mullen announced its initial 2014 capital spending plan of $100 million, and
maintained its dividend at $1.20.
Impact: SLIGHTLY POSITIVE
Our target price moves up to $29.00 (from $28.00) on estimate revision and
rating remains a HOLD. Yield investors may be disappointed with the lack of
dividend growth.
Details
Mullen announced its 2014 capital budget of $100.0 million, with $75.0
million being allocated to its Oilfield Services segment and $25.0 million set
aside for its Trucking/Logistics operation. The capital is expected to help fund
the purchase of new trucks and specialized equipment to support continuing
operations.
Mullen did leave the option for potential increases in its budget to fund
additional projects, the development of land or to fund potential acquisitions.
The company also reiterated its intention to maintain its $1.20 dividend into
2014.
Outlook
In our view, the most compelling dimension of the announcement was the
dividend. By not increasing the payout in a year of robust spending, we
believe that management is signaling that, unlike in 2012 and 2013, growth in
demand (and returns on capital) is more likely to accelerate in the next 18
months, driving the decision to hold the payout as it is. Mullen’s broad
exposure to oilfield operations likely gives management a relatively clear
picture of how shifting producer trends will affect demand, and where the next
dollar of capital can best be deployed. In our view, this decision allows for
material incremental spending in 2014, driven by existing business needs or
acquisitions to fill service line gaps.
Company Profile
Mullen is a western Canada-based oilfield
service and trucking company providing
services through two divisions. The Oilfield
Services division provides rig moving, core
drilling,
transportation
of
oversized
equipment, and fluid hauling services. The
Trucking division provides truckload and
less-than-truckload services across North
America.
MTL-T: Price
30
30
28
28
26
26
24
24
22
22
20
20
18
18
16
2011
2012
2013
16
2014
January 21, 2014
Equity Research
Action Notes
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Exhibit 1: Forecast Change Summary
2012
2013 Forecast
2014 Forecast
2015 Forecast
Actual
New
Old
Chng
New
Old
Chng
New
Old
Chng
$897.3
$200.1
22.3%
$873.6
$201.9
23.1%
$873.6
$201.9
23.1%
0.0%
0.0%
$924.8
$224.1
24.2%
$924.8
$224.1
24.2%
0.0%
0.0%
$972.3
$237.2
24.4%
$972.3
$237.2
24.4%
0.0%
0.0%
Revenue-$mm
$535.6
$563.6
$563.6
0.0%
$607
$607
0.0%
$624
$615
1.4%
EBITDAS-$mm
$98.4
$99.0
$99.0
0.0%
$113
$113
0.0%
$123
$120
2.1%
EBITDA Margin-%
18.4%
17.6%
17.6%
18.6%
18.6%
19.7%
19.5%
$1,427.6
$298.0
20.9%
$1,434.1
$308.8
21.5%
$1,434.1
$308.8
21.5%
0.0%
0.0%
$1,528.4
$331.6
21.7%
$1,528.4
$331.6
21.7%
0.0%
0.0%
$1,592.9
$354.1
22.2%
$1,584.3
$351.6
22.2%
0.5%
0.7%
Net Income - $mm
per Share (FD)
Cash Flow - $mm
$132.4
$1.58
$303.5
$158.5
$1.72
$330.4
$158.5
$1.72
$330.4
0.0%
0.0%
0.0%
$163.9
$1.75
$349.2
$163.4
$1.75
$349.1
0.3%
0.3%
0.0%
$176.3
$1.87
$373.7
$172.6
$1.83
$370.8
2.1%
2.1%
0.8%
per Share (FD)
Oilfield Services
Revenue-$mm
EBITDAS-$mm
EBITDA Margin-%
Trucking/Logistics
Revenue - $mm
EBITDAS-$mm
EBITDAS Margin-%
$3.72
$3.68
$3.68
0.0%
$3.87
$3.87
0.0%
$4.14
$4.10
0.8%
CAPEX (ex-acquistns)- $mm
$123
$121
$121
0.0%
$100
$110
-9.1%
$120
$160
-25.0%
Exit Net Debt - $mm
$311
$314
$314
0.0%
$213
$223
-4.5%
$85
$136
-37.4%
Source: Company reports, TD Securities
Valuation
At an EV of over 8.0x our 2015 EBITDAS forecast, Mullen is trading at or beyond historical averages.
However, we believe that the growing importance of logistics to WCSB operations places Mullen squarely in
the drivers’ seat and, in our view, presents a wide array of growth investment options. Mullen is among the
most efficient allocators of capital in our space and, in our view, has earned its current multiple premium,
though without a strong shift in sentiment we do not forecast large returns in the next 12 months.
Exhibit 2: Industry Comparables
20-Jan
Mkt.
Ticker
Price
Cap ($mm)
Logistics & Fabrication
EV ($mm)
2012A
EPS
2013E 2014E
2015E
2012A
P/E
2013E 2014E
2015E
EFX-T
$15.20
$1,183
$1,190
$0.92
$0.83
$1.10
$1.37
16.5x
18.3x
13.8x
11.1x
MTL-T
$28.71
$2,593
$2,906
$1.58
$1.72
$1.75
$1.87
18.2x
16.7x
16.4x
15.4x
SES-T
$16.90
$1,962
$2,097
$0.33
$0.38
$0.63
$0.94
51.2x
44.5x
26.8x
18.0x
SCL-T
$40.00
$2,388
$2,638
$2.48
$3.39
$3.46
$4.22
16.1x
11.8x
11.6x
9.5x
24.1x
19.7x
25.5x
12.0x
21.6x
18.6x
58.4x
22.8x
15.6x
22.9x
2012A
2013E
2014E
2015E
Sub-segment Averages
Drillers
Pressure Pumpers
Oilfield Services
Group Average
Current
Ticker
EBITDAS ($mm)
13.5x
21.3x
17.2x
1.7x
13.1x
12.2x
10.8x
13.5x
7.4x
11.1x
EV/EBITDAS
P/Book
Div.
Yield
2012A
2013E
2014E
2015E
EFX-T
MTL-T
1.3x
2.9x
$0.29
$1.20
1.9%
4.2%
$160
$298
$144
$309
$165
$332
$193
$354
5.7x
7.3x
8.2x
9.4x
7.2x
8.8x
6.2x
8.2x
SES-T
SCL-T
3.6x
3.8x
$0.15
$0.50
0.9%
1.3%
$100
$273
$137
$399
$185
$369
$237
$435
9.8x
8.2x
15.3x
6.6x
11.3x
7.1x
8.8x
6.1x
Sub-segment Averages
Drillers
Pressure Pumpers
Oilfield Services
Group Average
1.2x
1.9x
2.9x
0.9x
1.7x
5.3x
7.1x
7.0x
5.9x
6.4x
6.8x
14.7x
2.2x
-5.5x
6.0x
5.8x
7.5x
6.9x
5.1x
6.6x
5.3x
5.0x
5.5x
3.7x
5.4x
Source: Company reports, TD Securities, ThomsonONE
Action Notes
January 21, 2014
Equity Research
9 of 61
We set target prices for our universe as being defined by a multiple range. In the case of Mullen, the multiple
range is between 7.5x–8.0x on our 2015 EV/EBITDAS (from 2014) forecast. On our updated estimates, our
target price is increased to $29.00 (from $28.00) based on the low end of the range. We reiterate our HOLD
rating.
 Weakness in commodity prices and resulting producer spending
 Unseasonable weather
 Finding, training, and retaining qualified staff
 Availability of equipment and parts
 General economic weakness
Mullen’s announcement of a $100 million capital spending plan was in line with our $110 million forecast. In
our view, the maintenance of the dividend at $1.20 hints at the potential for capital spending to ramp up
materially through 2014 and into 2015, especially if LNG projects and pipelines advance. Mullen’s history of
prudent capital deployment supports our view of earnings growth in the forecast period, while not increasing
the dividend provides possible read-throughs for potential spending growth. We have adjusted our estimates
for the announcement and as a result, our target price moves to $29.00 (from $28.00) and we maintain our
HOLD rating.
January 21, 2014
Equity Research
Action Notes
10 of 61
MULLEN GROUP (MTL-T, HOLD, Target price: C$29.00)
Price Assumption
Oil-WTI
Gas-Henry Hub
Gas-AECO
2012A
$94.14
$2.75
$2.38
2013E
$98.00
$3.70
$3.20
2014E
$92.50
$4.00
$3.50
2015E
$90.00
$4.00
$3.70
Rig Count Assumptions
WCSB Wells Rig Released
WCSB Drilling Rig Op Days
WCSB Drilling Rig Utilization
2012A
11,289
128,282
43%
2013E
11,489
122,852
41%
2014E
11,750
127,718
43%
2015E
12,150
136,286
46%
Income Statement
Revenues
$mm
2012A
1,427.6
2013E
1,434.1
2014E
1,528.4
2015E
1,592.9
Operating Costs
% of revenues
$mm
%
1,131.1
79.2
1,126.5
78.6
1,196.8
78.3
1,238.7
77.8
EBITDAS
% of revenues
$mm
%
298.0
20.9
308.8
21.5
331.6
21.7
354.1
22.2
Depreciation & Amortization
EBIT
% of revenues
$mm
$mm
%
83.7
214.3
15.0
85.2
223.5
15.6
87.1
244.5
16.0
89.6
264.5
16.6
Interest & taxes
Non-recurring items
$mm
$mm
76.6
0.0
64.9
0.0
63.1
0.0
68.7
0.0
Net Income
Reported EPS (basic)
Reported EPS (diluted)
$/b
$/mmbtu
C$/mcf
Valuation
P/E
P/CF
Enterprise Value
EV/EBITDAS
Dividend Yield
P/BV
P/TBV
x
x
$mm
x
%
x
x
2012A
18.2
8.3
2,188
7.3
3.5
3.1
4.8
2013E
16.7
8.0
2,906
9.4
4.2
2.8
4.0
2014E
16.4
7.7
2,906
8.8
4.2
2.4
3.3
2015E
15.4
7.2
2,906
8.2
4.2
2.1
2.7
Cashflow Analysis
Cash Flow from Operations
Chgs in Working Cap
Net Cash Flow from Operations
Cash Flow from Investing
Cash Flow from Financing
Increase in Cash
$mm
$mm
$mm
$mm
$mm
$mm
2012A
303.5
-23.6
279.9
-107.9
-114.9
56.8
2013E
330.4
105.2
435.7
-129.4
-138.2
-18.5
2014E
349.2
-40.6
308.6
-100.0
-111.5
97.1
2015E
373.7
-17.2
356.6
-120.0
-111.5
125.1
Free Cash Flow
Capital Expenditures
CFOPS
Capex/Cash Flow
Payout Ratio
$mm
$mm
$
%
%
130.6
-109.0
3.47
-35.9
27.2
57.3
-121.5
3.57
-36.8
36.5
126.7
-100.0
3.74
-28.6
31.0
171.7
-120.0
4.00
-32.1
29.0
Quarterly Forecast
Revenue - Oilfield Services
Revenue - Trucking & Logistics
Total Revenue
$mm
$mm
$mm
1Q13
257.6
129.1
385.5
2Q13
173.7
137.3
310.4
3Q13
229.0
145.7
374.0
4Q13
213.4
151.6
364.3
$mm
$
$
132.4
1.62
1.58
158.5
1.77
1.72
163.9
1.81
1.75
176.3
1.95
1.87
Dividend Per Share
$
1.00
1.20
1.20
1.2
EBITDAS
% of revenues
$mm
%
87.8
22.8
55.9
18.0
87.6
23.4
77.4
21.2
Basic WA Shs OS
Diluted WA Shs OS
mm
mm
87.4
89.8
90.3
94.3
90.3
94.3
90.3
93.9
Interests & other costs
Non-recurring items
$mm
$mm
6.8
0.0
6.5
0.0
6.4
0.0
6.7
0.0
Balance Sheet
Cash
Debt
Net Debt
Net Debt/Equity
Debt/Equity
$mm
$mm
$mm
%
%
2012A
122.8
432.6
311.3
37.6
52.3
2013E
104.2
416.3
313.6
33.8
44.8
2014E
201.3
413.2
213.3
20.0
38.8
2015E
326.4
410.1
85.2
7.0
33.6
Net Income
Reported EPS (basic)
Reported EPS (diluted)
$mm
$
$
44.4
0.50
0.49
26.8
0.30
0.30
51.2
0.57
0.56
36.1
0.40
0.39
Total Assets
Total Liabilities
Total S/H Equity
$mm
$mm
$mm
1,556
729
827
1,630
701
928
1,769
704
1,065
1,948
728
1,221
%
%
%
-9.5
-12.0
-26.6
-3.1
2.7
224.2
11.5
20.8
15.8
5.2
8.6
15.3
mm
mm
88.1
92.1
90.2
94.2
90.3
94.3
90.3
94.3
Ratios Analysis
ROA
ROCE
ROE
%
%
%
2012A
8.6
15.4
17.3
2013E
10.0
15.9
18.1
2014E
9.6
15.2
16.4
2015E
9.5
15.5
15.4
37.6
104.5
9.46
6.12
33.8
101.6
10.28
7.11
20.0
64.3
11.79
8.78
7.0
24.1
13.51
10.68
Net Debt/Equity
%
Net Debt/EBITDAS
%
Book Value Per Share
$
Tangible Book Value Per Share
$
Source: Company Reports, TD Securities
Revenue Growth
EBITDAS Growth
EPS Growth
Basic WA Shs OS
Diluted WA Shs OS
Action Notes
Metals & Minerals
Recommendation:
HOLD
Unchanged
Risk:
January 21, 2014
Equity Research
11 of 61
Craig Hutchison, P. Eng.
HIGH
C$0.70
C$0.60
Prior:
12-Month Dividend:
C$0.00
16.7%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
EV ($mm)
Current Dividend
Dividend Yield
$0.60
$0.37-$1.30
$690.3
$1,076.0
$0.00
0.0%
609945
Paladin Energy Ltd.
(PDN-T) C$0.60
Langer Heinrich JV - A Positive Step Towards Reducing Debt
Event
Paladin Energy announced that it has signed an agreement with China
National Nuclear Corp. (CNNC) to sell a 25% joint venture equity stake in its
flagship Langer Heinrich uranium mine in Namibia for $190mm.
Financial Data (C$)
Fiscal Y-E
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
NAVPS (current)(basic)
June
1,150.5
963.3
815.9
$535.8
43.0%
$0.68
Estimates (US$)
Year
EBITDA ($mm)
EBITDA (old)($mm)
EPS (basic)
EPS (basic)(old)
CFPS (basic)
CFPS (basic)(old)
2013A
38.1
-(0.03)
-0.23
--
2014E
(7.9)
(7.9)
(0.11)
(0.11)
(0.02)
(0.02)
2015E
27.2
44.6
(0.05)
(0.05)
0.01
0.01
2016E
73.7
103.6
(0.01)
(0.01)
0.07
0.06
EPS (basic) Quarterly Estimates (US$)
Year
Q1
Q2
Q3
Q4
2013A
(0.03)
0.01
(0.01)
(0.01)
2014E
(0.03)
(0.03)
(0.02)
(0.02)
2015E
-----
2016E
-----
2014E
nmf
2015E
36.1x
2016E
13.3x
Impact
POSITIVE. The sale of a minority interest in Langer Heinrich should not
come as a major surprise to most investors, as the sale process has been a key
focus of the company over the past several months. From a valuation
perspective, we view the transaction as fairly neutral to our estimates. We
estimate that CNNC is paying approximately 1.0x our previous 10%NAV
estimate for Langer Heinrich of $781mm (100% basis). In our view, the key
takeaway from the transaction is that it provides the company with the
opportunity to significantly reduce its outstanding debt, thereby alleviating
any immediate concerns regarding the company’s liquidity position in the
current uranium price environment.
Another added benefit of the transaction is that it may provide Paladin with
the opportunity to sell additional offtake material from Langer Heinrich and
potentially reduce the variability of the company’s sales volumes. Although it
may be too early to determine whether the partnership with CNNC could
extend to Paladin’s other development assets, this could be an additional
benefit of the arrangement.
Valuations
Year
EV/EBITDA
2013A
25.8x
Supplemental Data (US$)
Year
U3O8 Prod. Mlb
U3O8 Sales Mlb
U3O8 Price/lb
Cons. EPS
2013A
8.26
8.25
49.84
-0.13
2014E
8.52
8.45
39.26
-0.02
2015E
8.38
8.38
42.75
0.06
2016E
8.38
8.38
50.00
0.07
Notes:Net debt and cash in US$
We have updated our estimates to reflect the close of the transaction in
Q1/F15, which assumes Paladin’s interest in Langer Heinrich is reduced to
75% thereafter. In addition, we have increased the value we attribute to the
company’s measured and indicated uranium resources not included in our
DCF estimates, to reflect the recent increases in similar valuations for its
peers. The net impact of the change increased our 10%NAVPS estimate to
C$0.68, which raised our target price to C$0.70 from C$0.60 previously. We
are maintaining our HOLD rating.
All figures in US$, unless otherwise specified.
Company Profile
Paladin is an Australian company focused on
the mining, production, and development of
uranium assets. The company's two
producing assets are the Langer Heinrich
Mine in Namibia and the Kayelekera Mine
(85%) in Malawi.
PDN-T: Price
6
6
5
5
4
4
3
3
2
2
1
1
0
2011
2012
2013
0
2014
Action Notes
January 21, 2014
Equity Research
12 of 61
Details

Under the offtake component of the agreement, CNNC will be allowed to purchase its pro-rata share of
uranium production at spot prices.

Both Paladin and CNNC’s boards have approved the transaction.

CNNC has agreed to pay a $20mm non-refundable deposit to Paladin.

Completion of the transaction is subject to Chinese regulatory approval, which is expected to be obtained
by mid-2014 along with consent from Paladin’s lenders and the Bank of Namibia.
Outlook
Uranium outlook — We expect sentiment towards the uranium market to improve over the course of 2014
and 2015, with Japanese nuclear plant restarts in H2/14 underpinning an improved outlook. We expect a
relatively tight supply/demand balance in the uranium market in 2014 as a result of:

Lost production from a number of mines, including ERA’s Ranger mine in Australia, Areva’s operations
in Niger and Rio Tinto’s Rossing mine in Namibia (all of which have faced operating challenges over the
past two months),

The end of the HEU Agreement on December 31, 2013, and

Production expansion delays recently announced by Russian and Kazakh producers.
We are forecasting average uranium prices of $40/lb in calendar 2014, increasing steadily to $45/lb in 2015,
$55/lb in 2016, $60/lb in 2017, and $65/lb in 2018–2019, before reaching our long-term price of $70/lb in
2020.
Fiscal 2014 could be a record year for production — Following last week’s solid Q2/F14 (December
quarter) production results of 2.21mmlb, we expect the company to achieve record annual production in 2014.
We are forecasting 2014 production of 8.52mmlb U3O8 (100% basis), including 5.57mmlb from Langer
Heinrich and 2.95mmlb from Kayelekera. Our production forecasts represent the approximate mid-range of the
company’s 2014 guidance of 8.3–8.7mmlb. We expect production to remain relatively flat through fiscal 2015
and 2016 at 8.38mmlb per year, after which grades and therefore production could taper off without further
increases to throughput or recoveries.
Langer Heinrich debt refinancing and 25% JV sale reduces our near-term liquidity concerns — The
company announced last week that it has refinanced its Langer Heinrich and Kayelekera project debt facilities.
The company has increased its Langer Heinrich debt facility to $110mm and extended the debt repayment term
to six years. The refinancing will allow the company to repay its Kayelekera debt facility and reduce debt
repayments by $35mm in 2014 and $24mm in 2015.
We expect the company to use the majority of the $190mm in gross proceeds from the sale of 25% stake in
Langer Heinrich to pay down debt, which totaled $660mm as at the end of September 2013. We now assume
that the company will need to refinance a total of $325mm in debt between fiscal 2016 and 2017 versus our
previous expectation which assumed that the company would need to refinance $600mm in debt between fiscal
2015–2017.
Valuation
We have updated our estimates to reflect the sale of 25% stake in its Langer Heinrich operation, which we
assume will close in July 2014 (start of fiscal 2015). In addition, we have increased the value we ascribe for
the measured and indicated resources at its producing assets currently not included in reserves to $6.00/lb from
$4.00/lb, along with the value we attribute to the company’s measured and indicated resources for its
development assets to $1.50/lb from $0.75/lb. Our increased nominal value per pound reflects the recent
increases in similar valuations for its peers. As a result of these changes, our 10%NAVPS estimate increased to
$0.65 from $0.55.
Our revised target price of C$0.70 (previously C$0.60) is based on 1.0x our 10%NAVPS estimate weighted
100%, using a 0.95 Canadian dollar/U.S. dollar exchange rate.
Action Notes
January 21, 2014
Equity Research
13 of 61
The main risks facing the company include forecast, financial, technical, and political risks. Among other
things, these include risks related to worldwide electrical utility industry demand, nuclear energy’s
competitiveness with other alternative sources of energy, uranium prices, and fuel prices, the governing fiscal
and legislative regimes, the timing of key developments, market conditions, access to capital, capital and
operating costs, foreign exchange rates, resources and reserves, operating parameters, permitting, environment,
indigenous people, and staffing and key personnel retention. Risks specific to Paladin include its high cost of
production and high level of consolidated debt.
In our view, Paladin has done a good job in ramping up production at its two operations; however, at our nearterm uranium price forecasts, we expect the company’s operations to generate little in the way of operating
cash flow. The sale of a minority interest in Langer Heinrich should provide the company with the financial
flexibility over the near term, until the uranium market conditions begin to improve, which we expect to occur
over the second half of 2014. We are maintaining our HOLD rating.
January 21, 2014
Equity Research
Action Notes
14 of 61
Exhibit 1. Company Snapshot
Paladin Energy Ltd. (PDN-T, PDN-ASX)
Fiscal Period Ending June 30
Risk Profile:
HIGH
Realized Metal Prices
Stock Rating:
HOLD
Avg.Price U3O8 (US$/lb)
52.06
43.98
35.95
35.14
38.00
41.00
37.52
42.75
50.00
Target Price:
C$0.70
Realized U3O8 Price (US$/lb)
54.93
49.84
41.38
36.67
38.00
41.00
39.26
42.75
50.00
Return:
=NAV!H5
Target Price Calculator
Multiple Implied Target
1.00
$0.65
Price 10% NAV
2015 EV/EBITDA
10.0
Implied Price Premium/Discount, %
Weight
100%
-$0.26
0%
Calculated Target Price (USD)
Rounded Target Price
Contribution Forex CAD to USD
$0.65
2015 Estimates
13%
15%
0.99
6%
0.98
0.96
0.95
4%
0.95
0%
0.95
0%
0.95
5%
0.95
0%
0.97
0%
$0.00
Total Uranium Production (mmlb)
$0.65
Langer Heinrich
4.42
5.29
1.43
1.43
1.39
1.32
5.57
5.60
5.60
Kayelekera
2.48
2.96
0.61
0.78
0.78
0.78
2.95
2.78
2.78
Total Production, U3O8
6.89
8.26
2.04
2.21
2.17
2.10
8.52
8.38
8.38
Total Attributable U Prod. (mmlb)
6.52
7.81
1.95
2.09
2.05
1.98
8.08
7.12
7.12
C$0.70
Sensitivity Analysis
2012A 2013A Q1/14A Q2/14E Q3/14E Q4/14E 2014E 2015E 2016E
NAVPS
CFPS
EPS
EBITDA($M)
10%
+/- US$5/lb U3O8
0.03
0.03
$28
$0.15
Reserves and Resources
Ore
Grade
(mm lb)
EV/lb
Langer Heinrich (100%)
$31
$30
$30
$30
$30
$30
$30
$30
$30
(mm t)
(% U3O8)
(U3O8)
(U3O8)
Kayelekera (85%)
$54
$43
$39
$39
$39
$38
$38
$36
$36
Total Cost per lb (Excl. Royal. + Dist.)
$38
$37
$36
$33
$33
$33
$33
$31
$31
Operating Costs (Excl. Royalty + Distribution Costs)
Total Proven and Probable
116.0
0.058
107.7
$9.99
Total Measured and Indicated
257.5
0.069
330.5
$3.25
Total Inferred
126.4
0.066
173.3
EV/lb (M+I+Inf.)
$6.21
Total Costs Sold (US$/lb U3O8)
$2.14
Uranium Sold, U3O8 mmlb
$41
6.70
$40
$39
$35
$35
$35
$36
1.67
2.77
1.80
2.20
8.45
8.38
Production Chart
$34
8.38
$50
2009
Langer Heinrich
8.0
Kayelekera
Total Cash Costs Sold (US$/lb U3O8)
2010
2.70
3.35
2011
3.53
0.00
0.96
2.17
$29
$37
2013
5.29
2014
5.57
2015
5.60
2016
5.60
2017
5.60
2018
5.60
2019
5.60
2020
5.60
2.96
2.95
2.78
2.78
1.55
1.55
0.87
0.31
$39
$40
$36
$34
$34
$34
$34
$33
$45
$33
$40
6.0
$35
4.0
$30
2.0
$25
0.0
Total Cash Costs Sold (Incl. Roy. +
Distribution), $/lb U3O8
10.0
Production 100% basis (mmlb, U3O8)
$34
8.25
$20
2009
2010
2011
2012
2013
Langer Heinrich
Net Asset Value Estimate
2014
2015
2016
2017
Kayelekera
2018
2019
2020
Total Cash Costs Sold (US$/lb U3O8)
8% Discount
US$M
US$/sh
10% Discount
US$M
US$/sh
Fiscal Period Ending June 30
Adjusted EPS, Attributable (US$)
(0.08)
(0.03)
(0.03)
(0.03)
(0.02)
(0.02)
(0.11)
(0.05)
Langer Heinrich (100%)*
634.5
0.66
534.0
0.55
CFPS (US$)
(0.15)
0.23
0.00
(0.01)
(0.01)
(0.00)
(0.02)
0.01
0.07
Kayelekera (85%)
51.3
0.05
47.4
0.05
Adjusted EBITDA (US$M)
30.1
38.1
(8.2)
(2.8)
(2.5)
5.5
(7.9)
27.2
73.7
TOTAL PROJECT NAV
685.8
0.71
581.4
0.60
Income Statement Items (US$M)
367.4
411.5
358.1
418.9
MINING ASSETS
Mining revenues
Operating costs
OTHER ASSETS
Deep Yellow Ltd. (DYL-ASX) Equity
2012A 2013A Q1/14A Q2/14E Q3/14E Q4/14E 2014E 2015E 2016E
Key Financial Information
6.1
0.01
6.1
0.01
Royalty + Distribution Costs
LHM (M+I) Resources Excluding P+P 78.1
0.08
78.1
0.08
Operating margin
(256.7) (305.8)
69.4
101.8
68.4
(60.5)
(91.2)
(59.3)
90.3
329.8
(0.01)
(71.9) (282.9) (263.8) (263.8)
(19.1)
(25.3)
(5.6)
(5.5)
(3.7)
(4.9)
(19.8)
(19.4)
(22.6)
91.6
80.4
3.3
5.0
5.4
13.4
27.2
74.9
132.4
Kayelekera (M+I) Resources Ex. P+P 51.7
0.05
51.7
0.05
Exploration
2.5
1.4
0.4
0.4
0.4
0.4
1.5
1.5
0.0
Aurora - Michelin (M+I) Resources
75.5
0.08
75.5
0.08
G&A
40.8
33.7
6.3
7.5
7.5
7.5
28.8
28.8
28.8
Manyingee (M+I) Resources
23.6
0.02
23.6
0.02
Interest Expense
36.4
40.9
8.8
9.0
9.0
8.5
35.4
33.3
37.5
Bigrlyi Deposit (M+I) (41.71%)
8.8
0.01
8.8
0.01
Depreciation
49.3
56.7
14.7
21.8
12.2
15.7
64.4
59.3
59.3
243.8
0.25
243.8
0.25
Taxes (recovery)
(78.7)
88.4
(0.9)
0.0
0.0
0.0
(0.9)
0.0
2.1
(43.8)
(33.7)
(23.7)
(3.8)
(1.5)
(0.7)
TOTAL OTHER ASSETS
Reported net earnings
Attributed to non-controlling interest
CORPORATE ADJUSTMENTS
(200.8) (474.2)
(28.0)
(53.1)
(18.7) (119.9)
(0.6)
(6.6)
(47.9)
4.8
2.9
11.0
Working Capital
215.6
0.22
215.6
0.22
Adjusted net earnings (attributable)
(65.5)
(27.7)
(28.6)
(32.2)
(22.9)
(18.1) (101.8)
(50.9)
Long Term Debt
(609.1)
(0.63)
(609.1)
(0.63)
Weighted Average Share Count
820.3
836.2
900.3
963.3
963.3
963.3
963.3
(125.8)
194.3
3.4
(11.9)
(11.5)
(3.0)
(23.0)
11.4
64.1
(12.1)
(15.6)
(1.3)
(2.5)
(2.5)
(2.5)
(8.8)
(10.0)
(10.0)
(17.1)
(17.1)
In the Money Options and Warrants
0.0
947.6
0.00
0.0
0.00
Cash Flow Statement Items (US$M)
Estimated Working Capital Additions 543.3
0.56
543.3
0.56
Operating CF bf. ch. in WC
Estimated Debt Additions
(353.3)
(0.37)
(353.3)
(0.37)
CF from investing (Ex. Capex)
Total Corp. Adjustments
(203.5)
(0.21)
(203.5)
(0.21)
Capex
(70.1)
(30.6)
(11.7)
(5.2)
(4.2)
(4.5)
(25.7)
CF from financing activities
201.5
(181.5)
56.3
(14.6)
(23.1)
(15.8)
2.8
(6.2)
963.3
178.3 (193.3)
TOTAL NAV (US$)
726.1
0.75
621.7
0.65
Balance Sheet Items (US$M)
TOTAL NAV (C$)
689.8
0.79
590.6
0.68
Cash
112.1
78.1
125.0
90.8
49.5
23.6
23.6
Working Capital
137.7
193.0
215.6
165.8
164.3
154.2
154.2
Long term debt
655.1
614.2
609.1
582.8
599.5
599.5
599.5
281.2
135.5
Total Debt
838.5
677.8
660.8
650.1
627.0
611.2
611.2
599.5
427.8
* Interest decreases to 75% in fiscal 2015
Source: company, TDS
186.2
29.9
10.2 (120.1)
Action Notes
Gold and Precious Minerals - Large-Cap
Golds
Recommendation:
January 21, 2014
Equity Research
15 of 61
Daniel Earle
HOLD
Unchanged
Risk:
HIGH
US$14.00
Unchanged
12-Month Dividend:
US$0.50
12.5%
Market Data (US$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
Current Dividend
Dividend Yield
$12.89
$9.78-$19.12
$1,952.8
$0.50
3.9%
825141
Pan American Silver Corp.
(PAAS-Q, PAA-T) US$12.89
2014 Guidance in Line
Event
Pre-market yesterday, Pan American reported its Q4/13 and 2013 production
and operating costs. The company also reported its 2014 production, operating
cost, and capital spending guidance.
Financial Data (US$)
Fiscal Y-E
Float Shares (mm)
Net Debt/Tot Cap
NAVPS (current)(f.d.)
Resources (mm oz)
Working Cap ($mm)
December
151.5
133.3
-$12.32
1,315.1
$699.0
Estimates (US$)
Year
EPS (f.d.)
EPS (f.d.)(old)
CFPS (f.d.)
CFPS (f.d.)(old)
2012A
1.26
-1.49
--
2013E
0.40
0.38
1.02
0.99
2014E
0.17
0.20
1.27
1.29
2015E
0.27
-1.29
1.34
Impact — NEUTRAL
We maintain our HOLD recommendation and our target price of $14.00 is
unchanged.
Details
Pan American finished the year with strong Q4/13 operating results, in our
view. Production was reported at 6.8 million ounces of silver at cash costs (all
cash costs referred to in this report are net of by-product credits) of $9.56/oz,
which beat our estimate of 6.4 million ounces at $10.60/oz. The production
beat appeared to come from the company’s flagship Dolores and La Colorada
operations in Mexico.
EPS (f.d.) Quarterly Estimates (US$)
Year
Q1
Q2
Q3
Q4
2012A
0.58
0.11
0.25
0.32
2013E
0.28
(0.08)
0.08
0.12
2014E
-----
2015E
-----
2013E
32.2x
12.6x
2014E
75.8x
10.1x
2015E
47.7x
10.0x
2014E
20.00
26,259
11.65
2015E
20.00
24,337
11.39
Valuations
Year
P/E (f.d.)
P/CFPS (f.d.)
2012A
10.2x
8.7x
Supplemental Data
Year
Silver $/oz
Silver Prd koz
Cash Cost $/oz
2012A
31.26
25,075
12.03
2013E
23.94
25,968
10.89
With the strong Q4/13 performance, 2013 silver production came in at the
high end of the company’s guidance range of 25 to 26 million ounces and
slightly better than our 25.6 million ounce forecast. Cash costs of $10.81/oz
were well below the company’s guidance range of $11.80/oz to $12.80/oz, but
in line with our $10.60/oz estimate.
The company’s costs declined approximately 8% to $9.56/oz in Q4/13 from
$10.40/oz in Q3/13. This occurred despite reduced by-product credits owing
to a 4% lower gold price, which we believe would have cost the company
$0.30/oz to $0.40/oz on its own. The outperformance appears to have come
from higher grades, especially higher gold grades in Argentina.
With yesterday’s operating results, Pan American also released its production,
operating cost, and capital spending guidance for 2014. Production of 25.75
million–26.75 million ounces at $11.70/oz–$12.70/oz was essentially in line
with our forecast of 26.1 million ounces at $11.25/oz, with the higher costs
owing to more conservative by-product metal price assumptions. Total capital
Company Profile
Pan American Silver is a senior silver
producer headquartered in Vancouver and has
operating mines in Mexico, Peru, Bolivia,
and Argentina.
PAAS-Q: Price
50
50
40
40
30
30
20
20
10
10
0
2011
2012
2013
0
2014
January 21, 2014
Equity Research
Action Notes
16 of 61
spending of $162.5 million ($95.5 million of which is sustaining and $67 million development) was in line
with our expectation of $161 million.
Valuation
We calculate that Pan American is currently trading at 1.1x our corporate NAV and 10.0x our 2015E CFPS
(Exhibit 1). These multiples are significantly below those of the silver producers and a slight discount to the
gold producers in our coverage universe. Within this group, we believe that the company’s closest peer is First
Majestic Silver Corp. (FR-T), which trades at 1.2x NAV and 9.0x 2015E CFPS.
Exhibit 1. Pan American Silver: Peer Valuation Comparison
P/E
Gold Producers
P/NAV
P/CF
2013E
2014E
2015E
2013E
2014E
2015E
Barrick Gold Corp.
1.74
7.4
16.2
15.4
4.9
7.1
6.7
Goldcorp Inc.
1.38
25.5
36.8
27.9
11.7
11.1
8.6
Newmont Mining Corp.
1.20
12.4
21.5
17.9
6.2
6.8
6.2
Kinross Gold Corp.
1.16
14.8
47.4
36.5
4.7
6.2
6.4
Agnico-Eagle Mines Ltd.
2.10
47.4
104.9
71.6
11.2
11.6
10.7
Eldorado Gold Corp.
0.73
23.0
35.2
30.1
11.8
14.7
13.7
Yamana Gold Inc.
1.11
22.8
28.5
26.8
9.8
9.2
8.5
IAMGOLD Corp.
0.71
12.7
34.8
178.6
4.7
6.0
5.7
New Gold Inc.
0.98
41.9
37.1
38.6
11.8
10.2
9.4
Osisko Mining Corp.
1.39
n/m
53.9
40.4
n/m
11.2
9.8
Centerra Gold Inc.
0.41
4.9
18.3
146.6
2.2
3.0
4.1
SEMAFO Inc.
1.23
24.2
48.2
21.1
10.0
12.2
7.2
Alamos Gold Inc.
0.85
19.5
115.0
32.3
11.0
18.8
16.4
AuRico Gold Inc.
1.98
64.0
56.0
64.0
14.4
13.2
10.2
B2Gold Corp.
0.99
20.2
28.5
20.5
11.1
11.2
8.8
Timmins Gold Corp.
0.66
6.8
10.5
10.7
3.7
5.6
5.8
Primero Mining Corp.
0.94
13.3
19.7
23.4
7.6
7.6
7.5
Average:
1.15
22.6
41.9
47.2
8.6
9.7
8.6
1.05
32.2
75.8
47.7
12.6
10.1
10.0
First Majestic Silver Corp.
1.20
24.4
27.3
13.2
10.0
14.5
9.0
Endeavour Silver Corp.
2.37
16.0
n/m
n/m
5.8
9.2
9.2
Silver Wheaton Corp.
1.48
20.5
20.9
20.3
14.6
14.4
14.0
Average:
1.52
23.3
41.3
27.1
10.8
12.1
10.5
Silver Producers
Source: TD Securities.
We generate our $14.00 target price by applying a 1.1x multiple to our corporate NAV (weighted 40%) and a
11.0x multiple to our 2015E CFPS (weighted 60%). Our NAV is based on a long-term silver price of
$20.00/oz. Our valuation approach is in line with the multiples we assign to what we perceive to be mid-tier
precious metals producers with limited near-term growth potential. We note that Pan American has a strong
balance sheet and pays what we consider to be a relatively attractive dividend.
Action Notes
January 21, 2014
Equity Research
17 of 61
Silver, gold, lead, zinc, and energy price risk; foreign exchange risk; financial risk, including risks to the cost
and availability of financing; forecast risk, including capital and operating cost risks, risks related to deposit
size, grade and mineability, and risks to production levels; technical risk, including risks associated with the
use of multiple mining techniques and their individual feasibility and risks to the process flowsheet that we
envision; infrastructure risk, including the availability of power and its reliability; transportation risk; political
risk, including the potential for resource nationalization and changes to the legal and fiscal regimes; permitting
risk; community social relations risk, including indigenous people risk; security risk, including the potential for
violence and access disruptions; labour relations risk; illegal mining risk; environmental risk; title risk;
litigation risk; surface rights risk; and staffing and key personnel retention risk.
Although Pan American has a strong balance sheet and pays what we consider to be an attractive dividend
relative to its precious metals peers, we believe that the company has relatively high cost operations that
generate limited free cash flow at forecast metal prices. The company’s current project portfolio offers limited
growth potential, in our view, while being exposed to above-average political risk. In this context, we believe
that the company is fairly valued at current share price levels. We maintain our HOLD recommendation.
Chemicals & Fertilizers
Recommendation:
HOLD
Unchanged
Risk:
Action Notes
January 21, 2014
Equity Research
Greg Barnes
Carey MacRury, CFA
18 of 61
HIGH
US$33.00
Unchanged
12-Month Dividend:
US$1.40
0.7%
Market Data (US$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
EV ($mm)
Current Dividend
Dividend Yield
$34.17
$28.55-$44.05
$29,970.5
$32,289.0
$1.40
4.1%
3,382,259
Potash Corp. of Saskatchewan Inc.
(POT-N, POT-T) US$34.17
Uralkali Announces H1/14 Chinese Potash Contract
Event
Uralkali has settled a H1/14 potash delivery contract with a consortium of
Chinese buyers at US$305/t CFR (-24% vs. the H1/13 contract price of
US$400/t CFR).
Financial Data (US$)
Fiscal Y-E
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
BVPS (f.d.)
NAVPS (current)(f.d.)
December
877.1
872.7
$3,023.0
23.3%
$11.36
$32.25
Impact — NEUTRAL/SLIGHTLY NEGATIVE
We believe that the $305/t CFR price is effectively in line with market
expectations – although at the lower end of the expected range of $300–
$325/t CFR. The price is also similar to the current market prices in Asia —
Malaysian and Indonesian palm oil producers recently settled 2014 potash
prices at ~US$300/t CFR.
2012A 2013E 2014E 2015E
3,928.0 3,301.0 3,149.0 3,402.0
-- 3,301.0 3,225.0 3,402.0
2.84
2.10
2.01
2.17
-2.10
2.08
2.17
3.83
3.19
2.67
2.84
-3.19
2.74
2.84
We have taken this opportunity to revise our 2014 potash price forecast
slightly. We have reduced our forecast U.S. Midwest West price to US$370/st
FOB (previously US$385/st FOB). We are maintaining our 2015 Midwest
West price at US$375/t FOB. In conjunction with the reduction in our lower
2014 Midwest West price, our forecast for PotashCorp’s offshore realized
price has also declined to US$278/t (previously US$290/t).
Estimates (US$)
Year
EBITDA ($mm)
EBITDA (old)($mm)
EPS (f.d.)
EPS (f.d.)(old)
CFPS (f.d.)
CFPS (f.d.)(old)
EPS (f.d.) Quarterly Estimates (US$)
Year
Q1
Q2
Q3
Q4
2012A
0.56
1.02
0.74
0.53
2013E
0.63
0.73
0.41
0.33
2014E
-----
2015E
-----
2013E
9.8x
16.3x
10.7x
2014E
10.3x
17.0x
12.8x
2015E
9.5x
15.7x
12.0x
Valuations
Year
EV/EBITDA
P/E (f.d.)
P/CFPS (f.d.)
2012A
8.2x
12.0x
8.9x
Year
Ammonia (NOLA)
DAP (Tampa)
Potash (Midw)
2012A
$603
$541
$516
2013E
$549
$462
$426
2014E
$450
$475
$370
2015E
$450
$485
$375
Our 2014 estimates have declined slightly; we have reduced our 2014 EPS
to $2.01 (from $2.08) and our EBITDA estimate declines to $3.149 billion
(from $3.225 billion). Our 2015 estimates remain unchanged.
We are maintaining our HOLD recommendation and $33.00 target price.
We continue to expect that the company’s dividend is sustainable and that
PotashCorp is well positioned to defend its market share. PotashCorp’s highquality, long-life potash reserves lie at the lower-end of the cost curve, which
should enable the company to withstand a protracted period of low potash
prices.
Details
The contract calls for Uralkali to deliver 700,000 tonnes in H1/14 —
600,000 tonnes to CNAMPGC, a leading Chinese agrochemical company, and
100,000 tonnes to Sinochem Corp. — the tonnage is being viewed as
sufficiently large to establish a benchmark contract for H1/14.
Company Profile
PotashCorp. is based in Saskatoon,
Saskatchewan. The company is the world's
largest potash producer with approximately
20% of global capacity. PotashCorp is also a
significant producer of nitrogen and
phosphate, ranking number three in the world
in terms of available capacity.
POT-N: Price
70
70
60
60
50
50
40
40
30
30
20
2011
2012
2013
20
2014
Action Notes
January 21, 2014
Equity Research
19 of 61
As far as we are aware, Canpotex has not yet settled H1/14 contract pricing with the Chinese — but
pricing is generally in line with its competitors, and as such we should expect a price in the low-US$300/t CFR
range once the contract is announced.
There is hope that with the Chinese benchmark price now established, a price bottom has been set for
potash (which seems to be borne out by the chart below). There are some reports that price increases may be
possible in markets experiencing stronger demand, including Brazil. Last week, CRU reported that prices in
Southeast Asia ticked higher, to US$320/t CFR from US$313/t CFR.
Exhibit 1. International Potash Prices
500
US$/tonne or short ton
450
400
350
300
250
Potash granular FOB US Midwest West (USD/st)
Potash granular CFR Brazil (USD/mt)
Potash granular FOB Vancouver (USD/mt)
Potash standard CFR Southeast Asia (USD/mt)
Source: CRU, TD Securities estimates
Outlook
PotashCorp to report Q4 results and provide 2014 guidance on January 30 — We are forecasting Q4/13
EPS of $0.33, which is in line with consensus. Our Q4 estimates assume potash sales of 1.86 million tonnes
and realized price of US$282/t. PotashCorp noted in early December that it expects ~$70 million in severance
charges to be recognized with Q4/13 results. In addition, due to the workforce reductions announced in
December, the company is reviewing the carrying value of the assets affected by the lay-offs; if an impairment
charge is required, it will also be reflected in Q4/13 results.
TD 2014 forecasts — We anticipate that PotashCorp will provide 2014 guidance when it releases 2013 and
Q4/13 results. We are projecting potash sales of 9.0 Mt, or ~16% of the low end of the company’s forecast for
global potash demand of 56–58 Mt and in line with the company’s recent global market share. As noted above,
we have reduced our 2014 potash price deck. Our full forecasts are summarized in Exhibit 2.
January 21, 2014
Equity Research
Action Notes
Exhibit 2. Consolidated Operating and Financial Forecast
Segment Summary
Sales volumes (Mt)
Potash
Nitrogen
Phosphate
Realized prices ($/t)
Potash
Nitrogen
Phosphate
Consolidated Summary
($mm)
Summary P&L
Net Sales
Operating costs
2010
2011
2012
2013E
2014E
2015E
2016E
8.64
5.21
3.63
9.05
5.01
3.85
7.23
4.81
3.64
8.20
5.69
3.66
9.00
5.56
3.66
10.00
4.94
3.66
10.30
4.94
3.66
$316
$290
$455
$337
$412
$411
$592
$450
$424
$431
$568
$460
$332
$375
$494
$380
$278
$337
$465
$334
$282
$365
$483
$344
$282
$372
$497
$347
2013E
2014E
2015E
2016E
2010
2011
2012
$6,050
$3,024
$8,218
$3,452
$7,433
$3,455
$6,758
$3,300
$6,239
$3,048
$6,551
$3,006
$6,722
$3,105
$3,026
50.0%
$402
$228
$77
($227)
$2,949
48.7%
$2,949
$1,801
30%
$4,766
58.0%
$481
$217
$147
$13
$4,786
58.2%
$4,389
$3,080
37%
$3,978
53.5%
$568
$219
$180
$73
$3,928
52.8%
$3,506
$2,490
34%
$3,458
51.2%
$635
$213
$169
$91
$3,301
48.8%
$2,985
$1,842
27%
$3,191
51.1%
$660
$208
$157
$40
$3,149
50.5%
$2,786
$1,747
28%
$3,545
54.1%
$683
$208
$284
$40
$3,402
51.9%
$3,013
$1,888
29%
$3,616
53.8%
$690
$208
$312
$40
$3,445
51.3%
$3,056
$1,902
28%
Summary cash flow analysis
Operating cash flow2
$2,356
Capex
$1,978
Free cash flow
$378
Dividends
$119
Surplus cash flow
$259
$3,703
$2,176
$1,527
$208
$1,319
$3,358
$2,133
$1,225
$467
$758
$2,794
$1,600
$1,194
$1,002
$192
$2,323
$1,310
$1,013
$1,208
($196)
$2,472
$1,040
$1,432
$1,208
$224
$2,494
$820
$1,674
$1,208
$466
Financial per-share metrics ($/sh)
Adj. EPS
$1.98
CFPS
$2.59
EBITDA
$3.24
FCF
$0.41
$3.51
$4.23
$5.46
$1.74
$2.84
$3.83
$4.48
$1.40
$2.10
$3.19
$3.77
$1.36
$2.01
$2.67
$3.62
$1.16
$2.17
$2.84
$3.91
$1.65
$2.19
$2.87
$3.96
$1.93
Gross cash margin
Gross cash margin %
DD&A
SG&A
Production taxes
Other
EBITDA
EBITDA margin
Adj. EBITDA1
Adj. net income
Net margin %
1
Excluding equity earnings and dividends from strategic investments.
Before changes in working capital.
Source: Company reports, TD Securities estimates
2
20 of 61
January 21, 2014
Equity Research
Action Notes
21 of 61
Exhibit 3. PotashCorp Net Asset Value Matrix
Operations
Potash
Nitrogen
Phosphate
Base Case NAV
8%
NAV
NAV/sh
US$ mm
US$/sh
$13,814
$15.80
$7,123
$8.15
$5,399
$6.17
$26,336
$30.12
Other
Net working capital
Investments
10%
NAV
NAV/sh
US$ mm
US$/sh
$10,249
$11.72
$5,699
$6.52
$4,319
$4.94
$20,267
$23.18
$1,066
$5,518
$1.22
$6.31
$1,066
$5,518
$1.22
$6.31
Total assets
$32,919
$37.65
$26,850
$30.71
LT Debt
SG&A
($2,969)
($1,750)
($3.40)
($2.00)
($2,969)
($1,400)
($3.40)
($1.60)
$28,200
$32.25
$22,481
$25.71
Net Asset Value
Source: TD Securities Inc.
Exhibit 4. TD Fertilizer Price Deck
2012 2013E 2014E 2015E
US$/st
$516 $426 $370 $375
US$/t
$541 $462 $475 $485
US$/t
$603 $549 $450 $450
US$/t
$475 $345 $305 $350
US$/mmBtu $2.75 $3.70 $4.00 $4.00
Potash (Midwest West Spot, FOB Granular)
Phosphate (DAP FOB Tampa)
Nitrogen (Ammonia FOB NOLA)
Nitrogen (Urea (FOB NOLA)
Natural Gas (Henry Hub)
LT
$375
$500
$450
$375
$5.00
Source: TD Securities estimates
Valuation
Exhibit 5. PotashCorp versus Fertilizer Peers
2012
P/E
2013E 2014E
2015E
2012
P/CFPS
2013E 2014E
2015E
2012
EV/EBITDA
2013E 2014E
2015E
PotashCorp
12.0
16.3
17.0
15.7
8.9
10.7
12.8
12.0
8.2
9.8
10.3
9.5
Uralkali
9.9
15.8
21.1
16.7
9.3
9.4
11.1
10.5
7.7
10.3
11.6
10.9
Mosaic1
12.3
16.9
16.9
14.1
11.0
11.7
10.2
9.8
6.5
8.6
8.2
7.1
Agrium Inc.
9.4
12.5
11.9
10.1
6.9
9.7
9.0
7.6
6.2
8.0
7.7
6.9
CF Industries
8.8
10.6
12.5
11.9
6.7
7.9
7.8
8.6
4.7
5.6
6.7
6.6
Yara International
6.7
9.8
10.8
10.1
5.1
6.7
7.2
7.1
4.2
5.8
6.3
6.1
Israel Chemicals
8.3
12.0
13.8
13.0
7.0
8.6
9.6
8.8
6.7
8.4
8.9
8.1
Sociedad Quimica y Minera
11.5
14.9
17.1
16.7
n/a
8.3
11.0
11.0
7.5
9.5
10.3
9.8
K+S
8.9
11.5
21.6
17.7
5.9
6.3
9.1
9.4
4.8
5.7
7.7
7.1
Intrepid Potash
14.0
37.7
57.0
35.4
6.6
12.3
10.8
10.4
7.2
12.7
12.6
10.2
10.2
15.8
20.0
16.1
7.5
9.2
9.8
9.5
6.4
8.4
9.0
8.2
Notes:
1
Mosaic year-end is May 31
Source: Capital IQ, TD Securities Inc.
Action Notes
January 21, 2014
Equity Research
22 of 61
Our target price is based on an EV/2015 EBITDA multiple of 9.0x. Our target price is based on adjusted
EBITDA from which we deduct contributions from the company’s equity investments; we add back 90% of
the market value of the equity investments (a slight holding company discount) to our adjusted-EBITDAgenerated valuation. Our 9.0x EV/2015 EBITDA target multiple is equivalent to the average forward
EV/EBITDA multiple that PotashCorp has traded at since 2006. The 9.0x multiple also reflects PotashCorp’s
long reserve life, its low end of the curve potash operating costs, and highly flexible balance sheet. Our $33.00
target price is also supported by our NAV-8% of $32.25/share and a dividend yield of 4.3%–4.5%, which
places PotashCorp in line with other resource-based, high-dividend-yielding stocks.
Exhibit 6. Target Price Calculation
1
Adj. EBITDA (2015E)
Target multiple
EV ($mm)
Add
Cash and cash equivalents
Investments (Mkt value less 10%)
$mm
$3,013
9.0x
$27,117
$555
$4,966
Less debt
($3,578)
Equity value
Equity value per share
Target price (rounded)
$29,059
$33.24
$33.00
1
Excluding earnings and dividend income from equity interests
Source: TD Securities Inc.
The main risks facing PotashCorp include the health of global agricultural markets, fertilizer demand, market
share, commodity prices, forecast, financial, technical, and political risks. Other risks include: changes to
governing fiscal, tax, import, and export regulations, subsidies or tariffs, and legislative regimes; the timing of
key developments; market conditions; capital and operating costs; foreign exchange rates; financing, shipping,
and transportation constraints; resources and reserves; operating parameters; permitting; environmental; and
staffing and key personnel retention.
We are maintaining our HOLD recommendation.
Energy Producers - Juniors
Recommendation:
BUY
Unchanged
Risk:
Action Notes
January 21, 2014
Equity Research
Juan Jarrah, CFA, P. Eng.
Arshia Noori (Associate)
23 of 61
HIGH
C$9.00
C$7.50
Prior:
12-Month Dividend:
C$0.00
26.2%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
Current Dividend
Dividend Yield
$7.13
$3.69-$7.30
$1,391.8
$0.00
0.0%
1,010,387
Financial Data (C$)
Fiscal Y-E
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
December
195.2
170.9
149.1
$99.0
25.7%
Estimates (C$)
Year
CFPS (f.d.)
CFPS (f.d.)(old)
Oil (b/d)
Gas (MMcf/d)
MBOE/d
2012A
------
2013E
0.68
0.68
5,435
1.3
5.6
2014E
0.99
0.98
9,034
2.9
9.5
2015E
1.17
1.17
10,835
3.0
11.3
CFPS (f.d.) Quarterly Estimates (C$)
Year
Q1
Q2
Q3
Q4
2012A
-----
2013E
0.14
0.15
0.19
0.19
2014E
0.25
0.22
0.25
0.26
2015E
0.28
0.27
0.30
0.32
Valuations
Year
EV/DACF
P/NAV
2012A
---
2013E
12.4x
72.0%
2014E
7.8x
--
2015E
6.8x
--
2014E
92.50
92.10
4.00
3.50
0.95
2015E
90.00
90.50
4.00
3.70
0.95
Supplemental Data
Year
WTI (US$/bbl)
ED PAR(C$/bbl)
NYMEX(US$/mcf)
AECO (C$/mcf)
F/X (US$)
2012A
94.10
86.29
2.75
2.38
1.00
2013A
98.01
93.42
3.73
3.18
0.97
Raging River Exploration Inc.
(RRX-T) C$7.13
Material Reserves Increase and Production Beat
Event
Last night, Raging River provided 2013 reserves and a positive production
update. Our target price increases to $9.00 (from $7.50) and our BUY
recommendation is unchanged.
Impact — POSITIVE. Reserves growth is material y/y and production is
above prior guidance.
The key highlights are:

2P reserves increased to 42.7 mmBOE from 17.2 mmBOE in 2012. Of the
27.6 mmBOE in additions, 83% were through the drillbit. 2P FD&A costs
(including changes in FDC) were $19.40/BOE, which, in our view, is
attractive for an oil player.

Q4 production of 7,700 BOE/d is 5% ahead of our prior forecast and
corporate guidance of 7,300–7,400 BOE/d. We now expect Q1/14
production to average 9,500 BOE/d (up from our prior estimate of 9,174
BOE/d) and in line with the annual company guidance.

Given some of the tremendous organic growth to-date and the current
valuation relative to its peers, we also review a scenario where Raging
River maintains its 2014 exit production for the foreseeable future.
Specifically, we look at wells drilled in the context of the current
inventory of drilling locations, the evolution of the decline rate over time,
and the free cash flow generation potential. We estimate that the company
can sustain a production rate of 11,000 BOE/d, while generating over
$100mm in free cash flow annually (over $0.50/share).
Details
2P reserves reflect an active year via the drillbit. As we show in Exhibit 1,
2013 year-end reserves were 42.7 mmBOE on a 2P basis (96% oil, 28% PDP,
73% 1P), which compares meaningfully with 2012 year-end reserves of 17.2
mmBOE (95% oil, 26% PDP, 67% 1P). Furthermore, the quality of the
reserves bookings is slightly higher, as shown by an increase in the PDP and
Company Profile
Raging River Exploration Inc. is engaged in
the acquisition, development, and production,
primarily of oil, in the Western Canadian
Sedimentary Basin. The company is
primarily focused on light oil prospects in the
Viking resource play in the greater Dodsland
area of west central Saskatchewan.
RRX-T: Price
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
Q1
Q3
2012
Q4
Q1
Q2
Q3
2013
1
Q1
2014
Action Notes
January 21, 2014
Equity Research
24 of 61
1P ratios, while the total FDC booked remains reasonable at 2.3x guided 2014 capex and 2.7x guided cash
flow.
Exhibit 1. Reserves Summary
RRX Reserves
2012
2013
PV10 BT ($mm) *
$423
$1,192
2P (mmBOE)
17.2
42.7
% Oil
95%
96%
% PDP
26%
28%
% 1P
67%
73%
2P FDC ($mm)
$226
$485
FDC / Guided CF
2.7x
2.7x
FDC / Guided Capex
1.9x
2.3x
Net Undeveloped Wells Booked
246
530
2P / Year-end Diluted Shares O/S (BOE / 1000 sh)
107
228
$24.64
$27.89
PV10 / BOE
* As evaluated by Sproule
Source: Company reports, TD Securities.
As the table suggests, the y/y reserves increase is material, particularly to our underlying net asset value
calculation. Our NAVBD increases to $4.87 (from $2.56) and our NAVMG increases to $9.90 (from $7.22),
which includes the drilling of 1,594 undeveloped Viking horizontal locations over the five-year horizon of our
NAV (of which 530 are booked in 2P reserves and 1,064 are in our growth NAV). This implies roughly 80%
of Raging River’s currently estimated number of drilling locations (120 net sections risked at 80%–90% and
95 net sections risked at 30%–70%).
Q4/13 and current production ahead of budget. The company averaged production of 9,000 BOE/d over the
final two weeks of 2013 and for the first two weeks of 2014. Q4/13 production is now expected to average
7,700 BOE/d, well ahead of the prior guidance of 7,300–7,400 BOE/d (TD’s prior estimate was 7,303 BOE/d).
We have not changed our outlook for 2014 substantially, as Raging River now could very well average 9,500
BOE/d in Q1/14, which is the current 2014 annual production guidance estimate.
However, 2014 annual guidance has not been revised, which speaks to the cautious nature of the management
team—being a single asset company that could see a significant impact during spring break-up. We believe
that guidance will remain unchanged until we get a better sense of Q2 production levels, but are more than
optimistic given the company’s track record of setting and exceeding guidance.
We believe that this asset is slowly becoming suitable for free cash flow generation. In previous research,
we have discussed Raging River approaching a significant crossroads—whether to continue along the highgrowth trajectory in the Viking, to expand into a new core area, or to perhaps consider a dividend model. As
we have done with a number of other companies under coverage, we attempt to look at a long-term
development profile based on the current inventory of drilling locations and a type curve based on public
production data to date. However, we also calculate the potential free cash flow that is generated in 2015 and
beyond if the company is to maintain the 2014 exit production rate of 11,000 BOE/d.
In Exhibit 2, we provide the outcome of a detailed well-by-well analysis, which we believe is better than we
would have anticipated prior to engaging in this exercise.
January 21, 2014
Equity Research
Action Notes
25 of 61
Exhibit 2. Looking at 2015 and Beyond
Year
Beginning Inventory (1)
Wells Drilled (2)
Remaining Inventory
2014
2,000
209
1,791
2015
1,791
144
1,647
2016
1,647
153
1,494
2017
1,494
144
1,350
2018
1,350
135
1,215
2019
1,215
117
1,098
2020
1,098
108
990
2021
990
99
891
2022
891
99
792
2023
792
90
702
2024
702
90
612
Production (BOE/d) (3)
Implied Base Decline (%)
9,509
38%
10,987
37%
11,022
39%
11,012
38%
11,073
35%
11,059
32%
11,037
28%
11,024
27%
11,057
25%
11,022
25%
10,968
24%
185
215
‐30
262
150
112
253
160
93
244
150
94
241
141
100
237
122
114
233
113
120
232
103
128
233
103
129
232
94
138
227
94
133
Cash Flow ($mm) (4)
Capex ($mm) (5)
Free Cash Flow ($mm)
1) Based on company disclosure
3) TD Type Curve (IP30 45 bbl/d, EUR 45 mBOE)
5) $0.95mm/well plus 10%
2) Equally split over Q1, Q3, and Q4 (i.e. no wells drilled in Q2)
4) Current futures strip
6) 2015+ based on maintaining 11,000 boe/d flat
RRX
RRX
14,000
CF
FCF
11,500
11,400
Production (boe/d)
Base
12,000
250.0
10,000
11,300
11,200
200.0
6,000
11,000
150.0
boe/d
11,100
8,000
$mm
Production (boe/d)
Capex
300.0
Dodsland Viking (RRX)
10,900
100.0
10,800
4,000
10,700
50.0
2,000
10,600
0
10,500
0.0
0
12
24
36
48
60
72
84
96
108
120
2015
2016
2017
2018
Month
2019
2020
2021
2022
2023
2024
Year
Outlook
We have revised our estimates as per the table below.
Exhibit 3. Revisions to Our Estimates
Production
Liquids (bbl/d)
Natural Gas (mcf/d)
Corporate (BOE/d)
% Liquids
Financial
Cash Flow ($mm)
DACF ($mm)
CFPS (fd)
Capex ($mm)
Net Debt ($mm)
% Undrawn Credit
Netbacks ($/BOE)
Gross Revenue
Hedging Gains (Losses)
Royalties
Transportation Costs
Operating Costs
Operating Netback
General & Administrative
Interest Expense
Cash Taxes/Other
Cash Netback
Q4/13E
Revised Previous
7,372
7,071
1,966
1,390
7,700
7,303
96%
97%
Variance
4.2%
41.4%
5.4%
2013E
Revised Previous
5,435
5,359
1,266
1,121
5,646
5,546
96%
97%
Variance
1.4%
13.0%
1.8%
2014E
Revised Previous
9,034
9,021
2,853
2,496
9,509
9,437
95%
96%
Variance
0.1%
14.3%
0.8%
2015E
Revised Previous
10,835
10,833
2,950
2,738
11,327
11,289
96%
96%
Variance
0.0%
7.8%
0.3%
34.0
34.5
0.19
60.0
99.0
72%
35.2
35.7
0.20
60.0
97.8
73%
-3.3%
-3.2%
-3.2%
0.0%
1.2%
115.1
116.2
0.68
167.3
99.0
72%
116.2
117.3
0.68
167.3
97.8
73%
-1.0%
-1.0%
-1.0%
0.0%
1.2%
185.0
188.3
0.99
215.0
129.0
59%
183.6
187.0
0.98
215.0
129.2
59%
0.7%
0.7%
0.2%
0.0%
-0.1%
218.9
223.4
1.17
270.0
180.1
36%
218.6
223.1
1.17
270.0
180.6
36%
0.1%
0.1%
-0.5%
0.0%
-0.3%
75.71
(1.81)
(7.57)
(2.10)
(12.60)
51.63
(1.91)
(0.75)
(0.97)
48.01
80.57
(1.91)
(8.06)
(2.00)
(12.50)
56.11
(1.79)
(0.78)
(1.21)
52.33
-6.0%
-5.1%
-6.0%
5.0%
0.8%
-8.0%
6.7%
-4.4%
-20.1%
-8.3%
84.11
(2.63)
(7.75)
(2.13)
(12.63)
58.96
(1.90)
(0.53)
(0.70)
55.85
85.87
(2.68)
(7.92)
(2.10)
(12.60)
60.58
(1.86)
(0.53)
(0.77)
57.42
-2.1%
-1.8%
-2.1%
1.6%
0.3%
-2.7%
2.2%
-1.4%
-9.8%
-2.7%
84.08
0.06
(8.49)
(2.00)
(12.80)
60.85
(2.28)
(0.96)
(4.32)
53.29
84.45
(0.13)
(8.53)
(2.00)
(12.80)
60.99
(2.26)
(0.99)
(4.42)
53.31
-0.4%
-149.3%
-0.4%
0.0%
0.0%
-0.2%
0.5%
-3.5%
-2.3%
0.0%
83.22
0.00
(8.40)
(2.00)
(12.80)
60.01
(1.94)
(1.10)
(4.04)
52.94
83.41
0.00
(8.42)
(2.00)
(12.80)
60.18
(1.89)
(1.10)
(4.14)
53.04
-0.2%
-0.2%
0.0%
0.0%
-0.3%
2.2%
-0.5%
-2.6%
-0.2%
January 21, 2014
Equity Research
Action Notes
26 of 61
Valuation
Raging River currently trades at a 2013 P/NAVMG of 72% and an EV/2014E DACF multiple of 7.8x; this
compares with an average of 69% (2012) and 5.9x, respectively, for the sub-$1.5bln market cap peer group
under coverage.
Exhibit 4. Relative Valuation Summary
RRX
P/NAVBD
(TD)
P/NAVMG
(TD)
147%
72%
EV/DACF
(2013E) (2014E)
12.4x
7.8x
EV/BOEPD
(2013E)
(2014E)
$254,696 $154,391
P/CF
EV/1PBOE EV/2PBOE D/CF Payout % Gas
(2013E) (2014E)
(2012E)
(2012E) (2014E) (2014E) (2014E)
7.2x
$95.94
$66.09
0.7x
116%
5%
Peer Group Average
106%
69%
8.0x
5.9x
$80,034
$64,289
5.4x
4.2x
i) EV based on forecast year-end net debt and shares outstanding, ii) Payout = (Capex+Dividend-DRIP)/CF
iii) Peer group consists of all companies under coverage with market cap less than $1.5 bln
10.5x
$26.30
$16.35
2.5x
130%
41%
Our modified growth NAV (NAVMG), assumes free cash flow (i.e. after 2P FDC, interest, G&A and dividends) is reinvested in company specific internal
development opportunities for up to a five year period.
Our target price reflects a base valuation of $8.87 that combines our NAVMG of $9.90 at a 60% weighting and
$7.33 using an EV/DACF multiple of 8.0x 2014E DACF at a 40% weighting. This is then rounded to arrive at
our calculated target price of $9.00. See Exhibit 5 for details.
Key risks associated with our target price include business risks of the company and industry, including but not
limited to: loss of key employees, drilling success, volatile commodity prices, operating costs, capital cost
overruns, product supply and demand, financing/access to capital, government regulations, legislation,
royalties, taxes, exchange rates, interest rates, and environment and weather concerns.
In addition to industry risks, key near-term risks specific to Raging River include: 1) asset and
production base almost exclusively levered to Canadian light oil pricing, 2) companies of this size face
growth challenges from a cost-structure perspective until they achieve economies of scale, 3) decline
rates from new wells could be substantially higher than expected, which could materially alter
production and reduce the cash flow used to finance future growth, and 4) exploratory focus gives rise to
the risk of new wells achieving lower-than-expected results.
The management team at Raging River continues to defend a premium valuation on the basis of better-thanforecast results and the delineation of an asset that has taken the company from a 1 mBOE/d producer in early
2012 to a ~10 mBOE/d producer currently, including a substantial increase in equity value. Last night’s
reserves increase and production beat should provide confidence to the market that a premium valuation is
justified. That said, we are also of the view that the company could be in a position to review its current
strategic direction, and for discussion purposes have provided a free cash flow scenario where 2014 exit
production is held flat over the foreseeable future.
We reiterate our BUY recommendation but increase our target price to $9.00 (from $7.50).
January 21, 2014
Equity Research
Action Notes
27 of 61
Exhibit 5. Summary
Production
Crude Oil (bbl/d)
Heavy Oil (bbl/d)
NGL's (bbl/d)
Total Liquids (bbl/d)
Natural Gas (mcf/d)
Total Production (BOE/d)
Y/Y Production Growth
% Liquids
Production Hedged (%)
2013E
5,435
0
0
5,435
1,266
5,646
96%
-
2014E
9,034
0
0
9,034
2,853
9,509
68%
95%
10%
2015E
10,835
0
0
10,835
2,950
11,327
19%
96%
0%
Key Valuation Ratios
P/CF (x)
Enterprise Value ($mm)
EV/DACF (x)
EV/Production ($000/BOE/d)
EV/1P Reserves ($/BOE)
EV/2P Reserves ($/BOE)
Debt-Adjusted Cash Flow ($mm)
P/NAV (2P)
P/NAV (Modified Growth)
2012A
2012A
$94.10
$86.29
$71.70
$2.75
$2.38
$1.00
$77.49
$2.33
2013E
$98.01
$93.42
$75.83
$3.73
$3.18
$0.97
$86.62
$3.18
2014E
$92.50
$92.10
$73.98
$4.00
$3.50
$0.95
$87.40
$3.48
2015E
$90.00
$90.50
$73.89
$4.00
$3.70
$0.95
$86.00
$3.65
Leverage
Net Debt ($mm)
Net Debt-CF (x)
Credit Facility ($mm)
% Available
2012A
2012A
Corporate Netback ($/BOE)
Revenue
Hedging
Royalties
Transportation
Operating
Operating Netback
G&A
Interest Expense
Cash Taxes and Other
Cash Flow Netback
2012A
2013E
$84.11
($2.63)
($7.75)
($2.13)
($12.63)
$58.96
($1.90)
($0.53)
($0.70)
$55.85
2014E
$84.08
$0.06
($8.49)
($2.00)
($12.80)
$60.85
($2.28)
($0.96)
($4.32)
$53.29
2015E
$83.22
$0.00
($8.40)
($2.00)
($12.80)
$60.01
($1.94)
($1.10)
($4.04)
$52.94
Shares Outstanding (mm)
WA Outstanding Shares (basic)
WA Outstanding Shares (diluted)
2012A
2013E
158.5
169.8
2014E
170.9
187.6
2015E
170.9
187.8
Cash Flow Statement ($mm)
Operating Activities
Net Income
Non-Cash Items
Funds Flow from Operations
Changes in Working Capital
CF from Operations
Investing Activities
Exploration and Development
Acquisitions/Divestitures/Other
CF from Investing
Financing Activities
Change in Total Debt
Shares Issued
Dividends/Other
CF from Financing Activity
Net Change in Cash
2012A
Per Share Metrics
CFPS (basic)
CFPS (diluted)
EPS (basic)
EPS (diluted)
2012A
2013E
$0.73
$0.68
$0.23
$0.21
2014E
$1.08
$0.99
$0.40
$0.36
2015E
$1.28
$1.17
$0.47
$0.42
Balance Sheet ($mm)
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Shareholders' Equity
Liab. and Shareholders' Equity
CFPS (diluted)
Q1
Q2
Q3
Q4
2012A
2013E
$0.14
$0.15
$0.19
$0.19
2014E
$0.25
$0.22
$0.25
$0.26
2015E
$0.28
$0.27
$0.30
$0.32
2012A
Quarterly Production (BOE/d)
Q1
Q2
Q3
Q4
2012A
2013E
4,551
4,621
5,679
7,700
2014E
9,505
8,506
9,656
10,358
2015E
11,180
10,613
11,404
12,100
Income Statement ($mm)
Oil & Gas Revenue
Hedging and Other Gains/(Losses)
Gross Revenue
Royalties
Operating
Transportation
G&A
Interest
DD&A
Other
Total Expenses
Total Income Taxes
Net Income
Reserves (mmBOE) - Sproule
Proved Developed Producing
Total Proved
Probable
Proved plus Probable
2012A
7.3
15.0
6.8
21.8
Pricing Assumptions
WTI (US$/bbl)
Edmonton Par (C$/bbl)
WCS (C$/bbl)
Nymex (US$/mcf)
AECO (C$/mcf)
Exchange Rate (US$/C$)
Realized Crude Oil & NGL (C$/bbl)
Realized Natural Gas (C$/mcf)
2012A
VALUATION NOTES
i) Proved and Probable reserves are based on 2013 reserve data adjusted for any
acquisition/divestiture and drilling activity during 2014
ii) 2013 2P reserves were 42.7 mmBOE
2013E
10.5x
1,438.1
12.4x
$254.7
$45.83
$33.66
116.2
147%
72%
2014E
7.2x
1,468.1
7.8x
$154.4
$46.79
$34.36
188.3
2013E
99.0
0.9x
225.0
72%
2014E
129.0
0.7x
225.0
59%
2015E
180.1
0.8x
225.0
36%
2013E
2014E
2015E
36.1
79.0
115.1
(14.2)
100.9
68.2
116.7
185.0
0.0
185.0
79.8
139.1
218.9
0.0
218.9
(167.3)
(80.0)
(247.4)
(215.0)
0.0
(215.0)
(270.0)
0.0
(270.0)
62.6
74.5
0.0
137.1
(9.4)
30.0
0.0
0.0
30.0
0.0
51.1
0.0
0.0
51.1
0.0
2013E
21.6
532.2
124.7
162.2
370.1
532.2
2014E
21.6
640.1
154.7
201.8
438.3
640.1
2015E
21.6
783.1
205.8
265.0
518.1
783.1
2013E
173.3
(9.9)
163.4
16.0
26.0
4.4
3.9
1.1
60.0
2.6
114.0
13.4
36.1
2014E
291.8
0.2
292.0
29.5
44.4
6.9
7.9
3.3
104.1
3.0
199.2
24.6
68.2
2015E
344.0
0.0
344.0
34.7
52.9
8.3
8.0
4.5
124.0
3.0
235.5
28.8
79.8
2013E
12.0
31.4
11.4
42.7
2015E
6.1x
1,519.2
6.8x
$134.1
$48.42
$35.55
223.4
NAV SUMMARY
Proved and Probable (2P)
Light Oil and NGLs
Heavy Oil
Natural Gas
Growth Areas
WC SK Viking
-
Net Undeveloped Land
WCSB Conventional
Other
Other Assets
Other Assets
Asset Value
Proved plus Probable
Growth Areas
Other Assets
Financial Assets (Liabilities)
Adjusted Net Debt **
Hedge Book
G&A
Dividend (net of DRIP)
Net Asset Value
NAV (Blow Down)
NAV (Modified Growth)
mmBOE
41.1
0.0
1.6
42.7
mmBOE
53.2
0.0
0.0
0.0
53.2
Net Acres
105,000
0
105,000
Valuation (After Tax NPV @ 8%)
$mm
$/share
$/BOE
997.6
5.31
24.28
0.0
0.00
0.00
5.8
0.03
3.56
1,003.4
5.34
23.48
Valuation (After Tax NPV @ 8%)
$mm
$/share
$/BOE
945.1
5.03
17.77
0.0
0.00
0.00
0.0
0.00
0.00
0.0
0.00
0.00
945.1
5.03
17.77
$mm
52.5
0.0
52.5
$mm
0.0
0.0
0.0
$mm
1,003.4
945.1
52.5
2,001.0
$mm
(99.0)
0.0
(42.9)
0.0
(141.9)
$mm
914.0
1,859.1
SHARE COUNT USED FOR VALUATION
Shares Outstanding
Basic
Dilutive Securities
Fully Diluted
Diluted Shares Outstanding (Treasury Stock)
Options Proceeds
Shares Repurchased
Shares Outstanding (diluted)
EV/DACF SUMMARY
2014E
DACF
Net Debt
Target Multiple
EV/DACF Target
TARGET PRICE CALCULATION
Components
NAV (Modified Growth)
EV/DACF
Target Price
Calculated
Rounded to nearest $0.50
$/share
0.28
0.00
0.28
$/share
0.00
0.00
0.00
$/share
5.34
5.03
0.28
10.65
$/share
(0.53)
0.00
(0.23)
0.00
(0.76)
$/share
4.87
9.90
$/acre
500
0
500
$/acre
0
0
0
170.9
24.3
195.2
mm
mm
mm
52.7
7.4
187.8
$mm
mm
mm
188.3
(129.0)
8.0 x
7.33
$mm
$mm
60%
40%
$/share
$9.90
$7.33
$8.87
$9.00
% Total
Assets
50%
0%
0%
50%
% Total
Assets
47%
0%
0%
0%
47%
% Total
Assets
3%
0%
3%
% Total
0%
0%
0%
% Total
50%
47%
3%
100%
Energy Producers - Intermediate
Recommendation:
BUY
Unchanged
Risk:
C$23.00
Unchanged
12-Month Dividend:
C$1.08
18.3%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
Current Dividend
Dividend Yield
$20.35
$12.26-$20.38
$4,238.9
$4,120.9
$1.08
5.3%
680197
Financial Data (C$)
Fiscal Y-E
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
December
208.3
202.5
-$1,128.0
23.0%
Estimates (C$)
Year
CFPS (basic)
CFPS (basic)(old)
Oil (b/d)
Gas (MMcf/d)
MBOE/d
2012A
3.27
-40,135
251.8
82.1
2013E
3.77
-41,849
285.3
89.4
2014E
4.08
-47,404
312.5
99.5
2015E
4.23
-48,464
331.0
103.6
CFPS (basic) Quarterly Estimates (C$)
2012A
0.86
0.74
0.66
1.01
2013E
0.87
1.02
0.98
0.90
2014E
0.98
1.03
1.05
1.02
2015E
1.04
1.05
1.07
1.07
2012A 2013E
5.8x
6.5x
-- 113.0%
2014E
6.0x
--
2015E
5.9x
--
Valuations
Year
EV/DACF
P/NAV MG
Supplemental Data (C$)
Year
WTI (US$)
NYMEX (US$)
AECO (C$)
F/X (US$)
January 21, 2014
Equity Research
Aaron Bilkoski
Sean Keaney (Associate)
28 of 61
HIGH
Year
Q1
Q2
Q3
Q4
Action Notes
2012A
$94.14
$2.75
$2.38
$1.00
2013E
$98.00
$3.73
$3.18
$0.97
2014E
$92.50
$4.00
$3.50
$0.95
2015E
$90.00
$4.00
$3.68
$0.95
Enerplus Corp.
(ERF-T, ERF-N) C$20.35
Duvernay: Potential for $0.5 Billion of Shareholder Upside
Event
Valuing Enerplus’ Willesden Green Duvernay Potential
Impact
NEUTRAL
Details
The U.S. Bakken and Marcellus have been, and will continue to be, key
drivers of value creation for Enerplus shareholders. Beyond these two areas,
Enerplus is currently in the early stages of testing a new play whose value
could potentially exceed ~$0.5 billion ($2.75/share) — the Willesden Green
Duvernay.
Industry development of the Duvernay remains in its infancy. This is
especially so at Willesden Green, where only ~12 wells are producing.
However, in this note, we look at the potential value of the play if continued
well results ultimately demonstrate that economic rates of return are
achievable. We fully acknowledge that public data is limited, but we believe
that there is value in: 1) highlighting the potential to Enerplus and, 2)
providing a lens whereby investors are better able to interpret the approaching
release of well results.
We remain attracted to Enerplus for its significant positions and demonstrated
operational success in the U.S. Bakken and Marcellus. Both of these plays
have been instrumental in driving shareholder returns over the past 12 months
and both offer multiple years of future development and growth. Moreover, in
spite of Enerplus’ recently robust share price performance, we believe that the
company remains attractively valued relative to its dividend-paying peers. It
also maintains a strong balance sheet, attractive growth profile and sectoraverage payout ratio.
We have made no revisions to our estimates and reiterate our $23.00 target
price and BUY rating.
Company Profile
Established in 1986, Enerplus is an incomeoriented oil and gas producer. The company
has a balanced and diversified portfolio of
producing properties across western Canada
and the U.S.
ERF-T: Price
35
35
30
30
25
25
20
20
15
15
10
2011
2012
2013
10
2014
January 21, 2014
Equity Research
Action Notes
29 of 61
WCSB Emerging Play Activity Focused on the Duvernay in 2014 — 2014 will be pivotal year for the
broader Duvernay play, given the significant investment planned by a combination of global super-majors and
Canadian large-cap producers. We estimate that in 2014 alone, $3 billion in capital will be spent to drill
approximately 200 wells. As we have discussed in prior research, the Duvernay play can generally be divided
into three core areas; Kaybob (north), Edson (central), and Willesden Green (south). Although much of the
aforementioned activity will be focused at Kaybob, which is further along the delineation timeline, industry derisking at Willesden Green could underscore the potential value associated with this region for Enerplus.
Exhibit 1. Willesden Green Duvernay Map
Liquids Rich Gas Window
COP Wells:
2.2 mmcf/d + 15 bbl/mmcf
L
C
BXE Well:
Strong 3mo. gas rate of
3.7 mmcf/d but no C5+
C
C
hz
ECA Wells:
0.4 mmcf/d + 46 bbls/mmcf
Dry Gas Window
TLM Wells:
Legend
Bellatrix
Conoco Phillips
Daylight/Sinopec
Encana
Enerplus
Oil Window
Penn West
Talisman
Yangarra
Vermilion
--
Held by Broker or Other
Phase Window Transition
Reef Outline
Source: geoScout, TD Securities
As with the early days in the Kaybob region, IP rates and condensate yields do not look compelling, but it
makes for an interesting starting point as producers de-risk the play and identify sweet-spots. Looking ahead,
delineation and refinement of completion techniques could result in rates/yields improving with time.
Exhibit 2. Public Willesden Green Duvernay Well Results & Condensate Yields
Condensate Yield (Bbls/mmcf)
250
200
150
100
50
0
0.0
0.5
1.0
1.5
2.0
2.5
3mo. Gas Rate (mmcf/d)
3.0
3.5
4.0
Well
Operator
102/10-03-041-05W5/03
Talisman Enrg Inc
mmcf/d
0.5
bbls/mmcf
211
100/13-17-043-04W5/02
EnCana Corp
1.2
109
100/03-06-042-05W5/02
Talisman Enrg Inc
1.0
105
100/11-05-043-06W5/02
EnCana Corp
0.4
102
100/16-05-042-08W5/02
EnCana Corp
2.2
46
100/03-06-043-07W5/02
EnCana Corp
2.3
22
100/07-16-044-07W5/02
ConocoPhillips Cd
2.2
15
103/11-15-045-07W5/00
ConocoPhillips Cd
0.6
11
100/09-24-044-10W5/02
Bellatrix Expl Ltd
3.7
0
102/16-25-044-05W5/02
Sinopec Daylight E
0.0
0
100/01-03-052-17W5/03
Cdn Nat Rsrcs Lm
3.2
0
100/01-20-038-28W4/00
EOG Rsrcs Cda In
0.2
1205
January 21, 2014
Equity Research
Action Notes
30 of 61
Enerplus’ Position within the Region — As outlined on the map above, Enerplus holds 85,000 net acres
(133 net sections) of Duvernay acreage at Willesden Green. The majority of this land is located in what we
believe is the condensate-rich window. In our view, similar to other plays (i.e., Kaybob Duvernay, Eagle
Ford…), this is likely to be the economic sweet spot in the current commodity price environment given the
balance between production rates and condensate yields (i.e., production rates high enough, but not too dry).
Inventory/Scalability of Enerplus Duvernay — Enerplus estimates that this acreage could provide an
inventory of 300–400 future drilling locations, which could equate to nearly $5 billion in future capital
spending — if this play works, it has significant running room.
Enerplus’ Cost of Entry into the Duvernay Low — Enerplus estimates that over the past three years it has
acquired its Duvernay position at approximately $750/acre (~$64 million).
Enerplus Activity to Date — To date, Enerplus has core results from three tests across the east-west extent of
its acreage. More interestingly, the company has now drilled two horizontal wells that it intends to
complete in Q1, with IP30 results potentially available in March. Given the minimal entry cost and lack
of market results/expectations to date, we believe that there is negligible value associated with the
Duvernay in Enerplus’ current share price. As a result, we would view successful results positively,
while a negative result would likely be neutral to the company’s share price.
What Could Success be Worth to Enerplus? — Proceeding under the full awareness that there is insufficient
public data to construct a defensible type curve in the region, we have created a production profile that we
believe could justify full-scale development in the region (see Exhibit 3).
Exhibit 3. Hypothetical Willesden Green Duvernay Type-Curve & Economics
Duvernay 2.8 mmcf/d + 200 bbls/mmcf
1,200
Production (BOE/d)
1,000
Inputs
Capital Costs
$12.0 mm
EUR
Opex - Fixed
$2,500/well month
Liquids Yield
Opex - Variable
$4.50/BOE
Y1 Production
524 BOE/d
G&A
$1.50/BOE
Y1 Op Netback
$43.88/BOE
$2.50/BOE
NGL Discount to WTI
Transportation
800
(Before Tax)
Results
AECO
600
400
200
793 mBOE
($/mcf)
NPV-10%
($mm)
$1.50
$3.0
$2.50
1
3
5
7
9 11 13 15 17 19 21 23 25 27 29 31 33 35
Month
9.0%
(AfterTax)
IRR (%)
NPV-10%
($mm)
0.25
23%
$1.33
0.11
16%
$4.2
0.35
28%
$2.22
0.18
21%
$3.50
$5.4
0.45
35%
$3.20
0.27
26%
$4.50
$6.6
0.55
41%
$4.08
0.34
31%
$5.50
$7.8
0.65
49%
$5.01
0.42
37%
P/I
Prod'n Efficiency-$/BOED
P/I
IRR (%)
WTI - $90/bbl
Capital Addition Efficiency
0
200 bbl/mmcf
(1 Yr)
(90 Day)
$/BOE
F&D
Recycle
Ratio*
Breakeven
$/mcf
$22,908
$14,224
$15.13
2.3x
$0.00
*RR is run over life of well
If we use this type curve to build out a 15-year development program, whereby 350 horizontal wells are
drilled (mid-point of company-stated inventory), we calculate that the success could be worth $500
million–$600 million or ~$2.75/share). We acknowledge that this is based on many variables, but we
believe that this is a useful tool to help investors measure Enerplus’ approaching horizontal well results.
January 21, 2014
Equity Research
Action Notes
31 of 61
Valuation
Enerplus was among the top performers of the Canadian intermediate producers in 2013. In our view, much of
this share price performance can be attributed to upward revisions to consensus CFPS estimates throughout the
year (Exhibit 4: Gray Shading), rather than a material gain in the company’s valuation on an EV/DACF basis.
We continue to believe that Enerplus trades at a material discount to both its historical norm and many of its
peers in spite of a comparably strong balance sheet, payout ratio and growth profile through 2014 and beyond
(see Exhibit 5).
Exhibit 4. Peer Group Valuation Comparison ($> 1 Billion Market Cap w/Yield)
10.0x
$6.00
$35.00
9.0x
$5.00
$2.00
EV/DACF Multiple .
CFPS ($/sh)
$3.00
$25.00
7.0x
6.0x
$20.00
5.0x
$15.00
4.0x
3.0x
Share Price
$4.00
$30.00
8.0x
$10.00
2.0x
Valuation
+/- 1 St. Dev
Average
Sep-13
Nov-13
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
$0.00
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
0.0x
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
$0.00
$5.00
1.0x
Jan-09
Mar-09
May-09
Jul-09
$1.00
CFPS
Share Price
Source: Bloomberg, TD Securities
Exhibit 5. Peer Group Valuation Comparison ($> 1 Billion Market Cap w/ Yield)
D/CF % Drawn
Mkt Cap. Yield 2014E
>$1 Billion Market Cap
LTS
FRU
BNE
WCP
BNP
PGF
ERF
PWT
BTE
VET
ARX
CPG
Median
$1,189
$1,535
$1,645
$2,135
$2,939
$3,746
$4,121
$4,486
$5,235
$6,485
$8,914
$15,674
$3,746
8%
7%
7%
5%
6%
7%
5%
6%
6%
4%
4%
7%
6%
3.6x
0.3x
1.0x
0.8x
2.2x
2.9x
1.4x
2.6x
1.2x
1.4x
1.0x
1.1x
1.3x
Source: Bloomberg, TD Securities
2014E
90%
25%
73%
21%
52%
6%
25%
19%
35%
67%
39%
35%
35%
Corporate P/O
2014E
Ex.
Inc.
DRIP
DRIP
110%
116%
114%
89%
125%
168%
118%
111%
124%
117%
122%
128%
117%
110%
98%
114%
89%
118%
160%
112%
105%
112%
106%
109%
111%
110%
BOE/d
2014E
Gas
45,011
8,597
12,754
27,751
78,352
73,307
99,485
108,994
61,003
45,935
114,455
126,834
61,003
20%
30%
29%
32%
62%
46%
52%
35%
11%
38%
62%
9%
32%
EV/DACF
P/NAVBD P/NAVMG
122%
268%
225%
144%
110%
81%
167%
170%
159%
189%
128%
166%
159%
61%
149%
130%
91%
74%
69%
113%
93%
112%
125%
88%
95%
93%
2014E 2015E
4.6x
12.7x
8.9x
6.2x
7.2x
8.4x
6.0x
6.1x
8.7x
10.2x
9.2x
8.0x
8.0x
4.8x
12.5x
8.8x
6.1x
6.8x
7.3x
5.9x
6.8x
9.1x
8.7x
8.8x
8.0x
7.3x
$/BOEPD
2014E
2015E
$76,894
$187,728
$145,416
$101,595
$53,445
$74,697
$53,927
$65,947
$100,644
$163,977
$88,583
$145,435
$92,076
$79,889
$193,971
$139,658
$97,487
$52,826
$75,669
$53,445
$74,020
$99,602
$137,498
$85,030
$140,533
$91,648
Action Notes
January 21, 2014
Equity Research
32 of 61
Our target price reflects a base valuation of $22.52 that combines 1.1x our modified growth NAV of $17.93 at
a 60% weighting and $26.73 using an EV/DACF multiple of 7.5x 2014E DACF at a 40% weighting.
royalties, taxes, exchange rates, interest rates, and environment and weather concerns.
We remain attracted to Enerplus for its significant positions and demonstrated operational success in the U.S.
Bakken and Marcellus. Both of these plays have been instrumental in driving shareholder returns over the past
12 months and both plays offer multiple years of future development and growth. Moreover, in spite of
Enerplus’ recently robust share price performance, we believe that the company remains attractively valued
relative to its dividend-paying peers as it maintains a strong balance sheet, attractive growth profile and sectoraverage payout ratio. We have made no revisions to our estimates and reiterate our $23.00 target price and
BUY rating.
January 21, 2014
Equity Research
Action Notes
33 of 61
Per Share Metrics
CFPS (Basic + Exch.)
DPS (Basic)
NAVBD
NAVMG
2006A
$7.28
$5.04
-
2007A
$6.54
$5.04
-
2008A
$8.12
$5.06
-
ERF
2009A
$4.43
$2.23
-
#REF!
$20.35
2010A
$4.01
$2.16
-
2011A
$3.19
$2.16
-
TICKER
ERF
2012A
$3.27
$1.62
-
TARGET
$23.00
2013E
$3.77
$1.08
$12.19
$17.93
RATING
BUY
2014E
$4.08
$1.08
-
2015E
$4.23
$1.08
-
Valuation
Share Price (Avg)
Shares Outstanding (Basic + Exch. - Period End)
$58.14
122.9
$47.11
129.8
$39.28
165.6
$23.78
177.1
$25.02
180.4
$29.00
181.2
$14.24
198.6
$20.35
202.5
$20.35
205.2
$20.35
208.0
Market Cap ($mm)
Net Debt ($mm)
$7,143
$810
$7,953
$6,115
$886
$7,001
$6,504
$835
$7,339
$4,211
$628
$4,839
$4,512
$931
$5,444
$5,254
$1,217
$6,471
$2,829
$1,191
$4,020
$4,121
$1,128
$5,249
$4,175
$1,190
$5,365
$4,232
$1,306
$5,538
Yield
P/NAV
P/CF
EV/DACF
EV/BOEPD
EV/2PBOE (Pro Forma)
Production
Oil & NGLs (bbls/d)
Heavy Oil (bbls/d)
Gas (mmcf/d)
Total BOE/d (6:1)
Gas %
9%
8.0x
8.7x
$92,862
$15.87
11%
7.2x
8.0x
$85,050
$13.77
13%
4.8x
5.5x
$76,695
$11.11
9%
5.4x
6.2x
$52,844
$14.25
9%
6.2x
7.1x
$65,477
$21.10
7%
9.1x
10.8x
$85,903
$18.33
11%
4.4x
5.8x
$48,970
$10.85
5%
113%
5.4x
6.5x
$58,723
$15.18
5%
5.0x
6.0x
$53,927
-
5%
4.8x
5.9x
$53,445
-
40,617
270.1
85,639
53%
38,610
262.3
82,318
53%
39,208
338.9
95,687
59%
37,135
326.6
91,569
59%
35,023
288.7
83,139
58%
33,488
251.1
75,332
56%
40,135
251.8
82,098
51%
41,849
285.3
89,393
53%
47,404
312.5
99,485
52%
48,464
331.0
103,623
53%
254.8
299.8
443.3
68%
240.4
289.9
440.2
66%
266.8
318.5
432.4
74%
266.8
257.4
344.9
75%
188.8
219.4
306.2
72%
179.3
220.8
321.9
69%
173.8
227.3
345.8
66%
-
-
-
9.4
13.9
9.9
14.9
9.0
12.1
8.2
10.9
7.5
10.5
8.0
11.7
7.6
11.5
-
-
-
ENERPLUS CORP.
Reserves (mmBOE)
PDP
Proved
Proved + Probable
% Proved
RLI & Capital Efficiency
RLI (Proven)
RLI (P+P)
FD&A + FDC (Proven)
FD&A +FDC (P+P)
Recycle Ratio (Proven)
Recycle Ratio (P+P)
Growth (Y/Y)
Production Growth
Absolute
Per Share
Per Share (Debt Adjusted)
P+P Reserve Growth
Absolute
Per Share
Per Share (Debt Adjusted)
Netback ($/BOE)
Gross Revenue
Hedge Gain/(Loss)
Royalties
Operating
Transportation
Operating Netback
General & Administration
Interest
Cash Taxes
Other Cash Items
Cash Netback
Cash Costs (Ex. Hedging)
Cash Flow ($mm)
Gross Revenue
Hedge Gain/(Loss)
Royalties
Operating
Transportation
General & Administration
Interest
Cash Taxes
Other Cash Items
Cash Flow ($mm)
$28.83
$23.18
($25.54)
($13.59)
($90.15)
($86.74)
$18.42
-
-
-
1.0x
1.2x
0.8x
1.0x
1.1x
0.6x
-0.9x
-1.6x
-0.3x
-0.3x
1.0x
1.1x
1.2x
-
-
-
7%
(3%)
(1%)
(4%)
(9%)
(12%)
16%
(8%)
(4%)
(4%)
(9%)
(14%)
(9%)
(14%)
(14%)
(9%)
(10%)
(10%)
9%
0%
(18%)
9%
6%
19%
11%
10%
10%
4%
3%
1%
(1%)
(6%)
(6%)
(1%)
(6%)
(9%)
(2%)
(23%)
(25%)
(20%)
(25%)
(21%)
(11%)
(13%)
(14%)
5%
5%
(3%)
7%
(2%)
(16%)
-
-
-
$50.39
($1.55)
($9.38)
($8.04)
$0.00
$31.42
($1.72)
($1.03)
($0.69)
$0.10
$28.08
($20.75)
$51.73
$0.45
($9.49)
($9.12)
($0.57)
$33.00
($1.98)
($1.40)
($0.77)
($1.07)
$27.78
($24.39)
$66.83
($2.95)
($12.28)
($9.50)
($0.79)
$41.32
($1.68)
($1.22)
($0.65)
($1.16)
$36.62
($27.26)
$37.63
$4.66
($6.21)
($9.79)
($0.79)
$25.50
($2.45)
($0.91)
($0.01)
$0.29
$22.43
($19.86)
$43.76
$1.47
($7.36)
($9.54)
($0.89)
$27.44
($2.41)
($1.54)
$1.00
($0.81)
$23.69
($21.55)
$49.60
($2.15)
($8.92)
($10.23)
($0.75)
$27.55
($2.99)
($0.96)
($2.96)
$0.20
$20.85
($26.60)
$45.57
$1.43
($8.97)
($10.67)
($0.89)
$26.48
($2.78)
($1.86)
($0.21)
($0.28)
$21.35
($25.65)
$49.63
($0.33)
($10.36)
($10.44)
($0.85)
$27.64
($3.05)
($1.77)
($0.38)
$0.70
$23.15
($26.14)
$50.39
($0.01)
($11.53)
($10.21)
($0.60)
$28.04
($2.77)
($1.62)
($0.76)
$0.00
$22.89
($27.49)
$51.08
$0.00
($11.90)
($10.21)
($0.46)
$28.52
($2.75)
($1.51)
($1.15)
$0.00
$23.10
($27.98)
$1,575
($49)
($293)
($251)
$0
($54)
($32)
($22)
$3
$878
$1,554
$14
($285)
($274)
($17)
($59)
($42)
($23)
($32)
$835
$2,341
($103)
($430)
($333)
($28)
($59)
($43)
($23)
($40)
$1,283
$1,258
$156
($207)
($327)
($26)
($82)
($31)
($0)
$10
$750
$1,328
$45
($223)
($290)
($27)
($73)
($47)
$30
($25)
$719
$1,364
($59)
($245)
($281)
($21)
($82)
($26)
($81)
$5
$573
$1,366
$43
($269)
($320)
($27)
($83)
($56)
($6)
($8)
$640
$1,619
($11)
($338)
($341)
($28)
($99)
($58)
($12)
$23
$755
$1,830
($0)
($419)
($371)
($22)
($101)
($59)
($28)
$0
$831
$1,932
$0
($450)
($386)
($17)
($104)
($57)
($44)
$0
$874
-
-
-
-
-
-
-
7%
11%
17%
13%
17%
13%
-
-
-
-
44%
45%
45%
44%
16%
28%
45%
25%
35%
76%
29%
51%
37%
18%
27%
1%
0%
0%
($436)
($30)
($467)
($394)
($265)
($658)
($588)
($1,265)
($1,854)
($306)
($168)
($474)
($565)
($147)
($712)
($877)
$335
($542)
($862)
$91
($771)
($687)
$208
($479)
($760)
$42
($718)
($815)
$0
($815)
($572)
$33
($98)
($647)
$50
($156)
($786)
$73
($19)
($368)
$24
$100
($384)
$29
($201)
($389)
$64
($629)
($302)
$44
($480)
($217)
$44
($104)
($220)
$45
($104)
($223)
$48
($116)
Cash Flow Sensitivity (%)
US$10.00/bbl ∆ WTI
C$1.00/mcf ∆ AECO
Hedging (%)
% Liquids Hedged
% Gas Hedged
% Hedged
Capex & Distributions ($mm)
E&D Capex
Net Acquisitions
Total Capex
Distributions
DRIP Savings
Free Cash Flow (Financing Requirement)
Tax Pools
Payout Ratio (%)
E&D Capex/CF
Distribution/CF
Corporate Payout (Capex+DPS)/CF
Adjusted Payout (Capex+DPS-DRIP)/CF
Debt ($mm)
Bank Debt
Working Capital Deficit
Convertible Debentures & Notes
Net Debt
Net Debt/Cash Flow
Credit Facility
% Drawn
Commodity Price Assumptions
WTI Crude Oil (US$/bbl)
Henry Hub Natural Gas (US$/mmbtu)
AECO Natural Gas (Cdn$/mcf)
Foreign Exchange (US$/Cdn$)
Source: Company Reports, TD Securities
$0
$34.64
$27.65
$2,280
$32.69
$65.66
$2,715
$2,882
$1,971
-
-
-
-
-
135%
47%
182%
175%
91%
29%
120%
114%
91%
26%
118%
112%
93%
26%
119%
113%
47%
77%
125%
119%
46%
61%
107%
101%
$810
0.9x
-
-
$0
$105
$522
$628
0.8x
$235
$199
$498
$931
1.3x
$446
$310
$461
$1,217
2.1x
$261
$122
$809
$1,191
1.8x
$192
$139
$798
$1,128
1.5x
$254
$139
$798
$1,190
1.4x
$370
$139
$798
$1,306
1.5x
-
$1,400
0%
$1,000
23%
$1,000
45%
$1,000
26%
$1,000
19%
$1,000
25%
$1,000
37%
$61.97
$4.16
$4.00
$0.88
$79.50
$4.36
$3.99
$0.97
$95.00
$3.98
$3.62
$1.01
$94.14
$2.75
$2.38
$1.00
$98.00
$3.73
$3.18
$0.97
$92.50
$4.00
$3.50
$0.95
$90.00
$4.00
$3.68
$0.95
$886
1.1x
$66.07
$6.73
$6.38
$0.88
$835
0.7x
$72.23
$6.97
$6.46
$0.93
$99.92
$8.89
$8.20
$0.94
79%
53%
132%
128%
153%
68%
221%
210%
50%
65%
115%
111%
-
41%
49%
90%
87%
$21.79
$18.99
Recommendation:
BUY
Unchanged
Risk:
Action Notes
January 21, 2014
Equity Research
Jamie Somerville
Soheil Sharifi (Associate)
34 of 61
HIGH
C$26.00
Unchanged
12-Month Dividend:
C$0.68
49.5%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
EV ($mm)
Current Dividend
Dividend Yield
$17.85
$17.55-$25.94
$6,270.7
$5,792.3
$7,890.3
$0.68
3.8%
1,075,750
Pacific Rubiales Energy Corp.
(PRE-T) C$17.85
On the Road with PRE; Conference Call Takeaways
Event
We recently hosted Pacific Rubiales’ Senior VP Investor Relations at our
London conference and in various European cities meeting with institutional
investors. Previously, on January 8, Pacific Rubiales held a conference call
with analysts and investors to discuss its 2014 guidance and outlook.
Financial Data (C$)
Fiscal Y-E
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
December
351.3
324.5
312.4
$3,530.1
32.2%
Estimates (US$)
Year
CFPS (f.d.)
Oil (b/d)
Gas (MMcf/d)
MBOE/d
2012A 2013E 2014E 2015E
4.86
6.13
8.32
9.10
89,307 120,635 150,741 173,275
54.1
51.7
52.2
80.1
98.3
129.2
159.4
186.6
CFPS (f.d.) Quarterly Estimates (US$)
Year
Q1
Q2
Q3
Q4
2012A
1.30
1.35
1.48
0.73
2013E
1.55
1.46
1.40
1.73
2014E
2.04
2.03
2.12
2.13
2015E
2.24
2.27
2.30
2.30
2013E
4.6x
2014E
3.0x
2015E
2.6x
Valuations
Year
EV/DACF
2012A
5.6x
Impact: SLIGHTLY POSITIVE.
Conference call takeaways: Management gave clarifications that we view as
slightly positive overall:

Indicative offers of approximately $400 million have been received for
close to 40% of Pacific Midstream and management now expects to
complete the sale in H1/14, generating cash while maintaining the cost
reduction and energy security benefits of the infrastructure assets.

Production guidance and comments on the conference call, in our view,
imply that Pacific Rubiales management expects to book significant
reserve additions for its newly acquired Rio Ariari block.

Conversely, production guidance for the Quifa North area implies that
this asset may under-produce relative to previously disclosed reserves
and resources. However, we view reserves write-downs as unlikely. In
addition, if we assumed deferred Quifa North development and
accelerated development on Rio Ariari (which has better fiscal terms),
we suspect our NAV estimates would increase (depending on costs to
develop Rio Ariari and reservoir performance). We plan to await yearend reserves disclosure before attempting any significant re-modelling.
Year
WTI (US$/bbl)
Base NAVPS
Risked NAVPS
2012A
$94.14
---
2013A 2014E
$98.00 $92.50
-- C$19.72
-- C$29.13
2015E
$90.00
---
Marketing takeaways: A majority of institutional investors that met the
company in Europe seemed to be intrigued by the company's share price
weakness and valuation, but looking for minor clarifications or additional
news before committing to investment.
Details & Outlook
Pacific Midstream price indication: Although the $400 million indicated
valuation for 40% of Pacific Midstream could include some assumption of
debt in the Pacific Midstream assets (and is not guaranteed until a deal is
finalized), we view it as a potentially positive indication because we currently
Company Profile
Pacific Rubiales is a Latin America-focused
E&P and the largest independent oil producer
in Colombia. The company's shares trade on
the TSX, with a secondary listing on the
Colombia Stock Exchange (BVC) and ADRs
listed in Brazil (BOVESPA).
PRE-T: Price
35
35
30
30
25
25
20
20
15
2011
2012
2013
15
2014
Action Notes
January 21, 2014
Equity Research
35 of 61
use book value (equating to less than $150 million for 40%) in our current NAVs. We believe that our
assumptions are roughly in line with or above other analysts’ and investors’ valuations for these assets, and
therefore view the price indication as a strong sign that Pacific Rubiales will again be able to demonstrate that
its infrastructure assets hold significant monetizable value (that the market is potentially under-estimating).
Recall that the company indicated in late September that it expected to sell pipeline interests acquired with
Petrominerales for around $400 million, and subsequently announced that it was selling most of the assets for
$385 million (representing a premium to the book value of $281 million).
Five-year production guidance: We believe that Pacific Rubiales' five-year production guidance (Exhibit 1)
implies an expectation that both the CPE-6 and Rio Ariari blocks can support processing facilities designed to
handle 60 mbbl/d of oil. This suggests that management sees recoverable resources of ~100 mmbbl as likely
on both the blocks. For CPE-6, this is roughly in line with the previously disclosed reserve and resource
estimates. However, for Rio Ariari (where there have been no reserve bookings to date), we believe that it
implies significant near-term reserve additions are likely.
Given a lack of clearly commercial flow rates having been reported at Rio Ariari (or CPE-6), we assume there
is a possibility that reserve auditors could take a relatively conservative stance. However, we nonetheless
expect reserve additions of 40 mmbbl or more. Rio Ariari additions should help to drive y/y reserves growth of
5%–10%, in our view. As previously indicated, we believe that reserve bookings for Rio Ariari could help
investors view the recent Petrominerales acquisition more positively.
Exhibit 1. Pacific Rubiales: Corporate Production Guidance by Asset
Source: Company reports
Action Notes
January 21, 2014
Equity Research
36 of 61
Meetings with institutions: The key issues that most investors wanted clarification on were the company's
2014 guidance, its acquisition strategy, and its corporate governance (as well as insider holdings and trading).
The additional information we believe investors would most like to see is a clear evidence of repeatable and
commercial flow rates from the CPE-6 and Rio Ariari blocks.
Valuation
Pacific Rubiales currently trades roughly in line with its closest International E&P peers on 2014E EV/DACF
and Fully-risked NAVPS. However, it trades at a significant discount to the average of its closest peers on
Base NAVPS, and is at a very large discount to Canadian Intermediate E&Ps of comparable size.
Exhibit 2. Pacific Rubiales: Relative Valuation
Fully-risked NAVPS
Base NAVPS
2014E EV/DACF
Recent
Price
Ticker
Current
Multiple
Estimate
Current
Current
Multiple
Multiple
20-Jan-14
Estimate
CNE
C$6.68
C$10.60
0.63x
C$4.18
1.60x
4.2x
GTE
C$7.72
C$9.92
0.78x
C$5.22
1.48x
4.2x
PXT
C$7.21
C$11.77
0.61x
C$5.91
1.22x
2.6x
PTA
C$0.33
C$0.50
0.65x
C$0.28
1.17x
1.5x
Average International E&Ps
0.48x
1.45x
4.0x
Closest comparables
0.67x
1.37x
3.1x
0.91x
3.0x
1.67x
9.2x
PRE
C$17.85
C$29.13
Canadian Intermediate E&Ps
0.61x
1.01x
C$19.72
* Fiscal 2015 used as equivalent to calendar 2014 for CNE and NKO
Source: TD Securities, Bloomberg
Our C$26.00 target price is based on a combination of 0.90x Base NAVPS and 0.85x Upside to Base NAVPS,
which is one of the highest multiples in our coverage of International E&Ps, because of what we see as
relatively strong management and finances. We currently use a range of 0.25x–0.95x in terms of our multiples
of Upside to Base NAVPS for producing International E&Ps.
unexpected changes in contract/fiscal terms, asset expropriation, royalties, taxes, exchange rates, interest rates,
and environment and weather concerns.
Key risks specific to Pacific Rubiales are:

Reserves risk, in particular related to the expiry of the company’s main producing contract in 2016.

Potential infrastructure constraints also present a significant risk.

Higher-than-average geo-political risk.

Commodity price risk is potentially exacerbated by Pacific Rubiales’ exposure to heavy oil differentials
and its oil trading activities.

The company has entered into several small non-arm’s length transactions, which create the potential for
conflicts of interest.
Looking at its history since 2006, in our view Pacific Rubiales has a world-class track record of operational
execution and acquisitions, delivering production and reserves growth (and significant value for shareholders).
It also has a large portfolio of development and exploration projects that could maintain growth. As the largest
Action Notes
January 21, 2014
Equity Research
37 of 61
(and most liquid) Latin America-focused independent E&P, we believe that Pacific Rubiales should be able to
regain at least some of the premium valuation it held previously.
Potential catalysts through H1/14 include results from regular drilling across a large portfolio of exploration
assets and further results for the STAR pilot. In our view, well testing results from the CPE-6 and Rio Ariari
blocks are crucial to confirm our medium-term production expectations. A planned sale of infrastructure assets
also appears likely and could help unlock value for shareholders.
We are concerned that Pacific Rubiales will need infrastructure expansion and local community co-operation
to maintain or grow production. However, we believe that near-term production constraints have now been
factored into valuation, although exploration and enhanced recovery upside potential have not.
Action Notes
January 21, 2014
Equity Research
38 of 61
Exhibit 3. Pacific Rubiales: Summary
PRE
Price
TSX
C$17.85
Basic S/O (mm)
f.d. S/O (mm)
Market Cap. (basic, C$mm)
Net debt / (Net cash), (C$mm)
Enterprise Value (basic, C$mm)
324.5
351.3
C$5,792.3
C$2,098.0
C$7,890.3
Post-tax PV
NET ASSET VALUE (2014E)
COS
Colombia
Peru
2P
2P
Total 2P Reserves
Risked
mmBOE
443.5
41.6
$mm
$7,896.2
$1,012.1
C$/
share
$24.54
$3.15
485.1
$8,908.4
$27.68
485.1
-$3,301.7
$54.5
$684.9
$6,346.1
-$10.26
$0.17
$2.13
$19.72
0.91
510.3
78.9
12.0
43.9
49.7
$3,057.7
$636.3
$82.6
$152.1
$483.6
$8.98
$1.87
$0.24
$0.45
$1.42
Total Upside Resource
694.8
Discounted proceeds from exercise-below-target options
Discounted G&A
Fully Risked NAV
1,179.9
P / Fully Risked NAVPS
$4,412.4
$268.1
-$1,113.0
$9,913.5
$12.96
$0.79
-$3.27
$29.13
0.61
Unrisked Upside Resource
Discounted unused proceeds from Options
Unrisked NAV
P / Unrisked NAVPS
$21,878.1
$11.5
$27,390.7
$64.20
$0.03
$80.38
0.22
Net cash/(debt)
Discounted proceeds from in-the-money options
Other long-term investments
Base NAV
P / Base NAVPS
Colombia
Peru
Guatemala
PNG
Brazil
Resource
Resource
Resource
Resource
Resource
26%
10%
10%
25%
52%
3,169.6
3,654.7
Rating
BUY
Risk
Target
Current yield
Total Return to Target
Fiscal Year-end
Last reported quarter
Reporting Currency :
HIGH
C$26.00
3.8%
49%
31-Dec
Q3/13
All dollar amounts in US$ unless otherwise noted
PRODUCTION (BOEPD)*
Colombia
Peru
2012
96,746
1,573
2013
127,951
1,291
2014E
157,047
2,395
Total
98,318
129,242
159,442
of which gas (%)
9%
7%
5%
* After Royalties, excluding sales adjustments. Including risked resources.
186,631
7%
FINANCIAL SUMMARY
Cash Flow ($mm)
CFPS - Basic
CFPS - f.d.
Net Income ($mm)
EPS - Basic
EPS - f.d.
Revenue* ($/BOE)
Operating Costs ($/BOE)
Operating Netback ($/BOE)
* net of royalties and hedging
2012
$1,472
$5.00
$4.86
$612
$2.08
$2.02
$96.52
$37.00
$42.68
2013
$2,006
$6.21
$6.13
$416
$1.29
$1.27
$96.22
$30.29
$47.90
2014
$2,742
$8.45
$8.32
$769
$2.37
$2.33
$96.23
$25.93
$50.13
2015E
$2,998
$9.24
$9.10
$679
$2.09
$2.06
$89.95
$24.89
$45.76
CAPITAL STRUCTURE
Wtd. Avg. Basic Shares (mm)
Wtd. Avg. f.d. Shares (mm)
Market Cap. ($mm)
Net Debt ($mm)
Capex ($mm)
Net Debt to Cash Flow
2012
294.6
302.8
$7,324
$1,448
$8,772
$1,548
1.0
2013
323.1
327.6
$6,619
$3,311
$9,931
$1,967
1.7
2014E
324.5
329.3
$5,517
$3,302
$8,818
$2,518
1.2
2015E
324.5
329.3
$5,517
$2,684
$8,200
$2,166
0.9
2012
3.6
8.6
5.6
$89,225
2013
2.8
13.6
4.6
$76,838
AREAS OF OPERATION
VALUATION METRICS
P/CF - f.d.
P/E - f.d.
EV/DACF
EV/BOEPD
Guatemala
RESERVES
2012
Proved* (mmBOE)
416.6
2P* (mmBOE)
641.0
FD&A Costs, 2P ($/BOE)
$17.57
EV/BOE (Proved, $/BOE)
EV/BOE (2P, $/BOE)
* Evaluated by Petrotech Engineering Ltd. and RPS Energy Canada Ltd.
Colombia
Papua NG
Peru
Brazil
Mature
Growth
Exploration
Price
(C$)
$5.10
# of Shares
(mm)
86.3
ASSUMPTIONS
Brent (US$/bbl)
WTI (US$/bbl)
Discount rate
Spot FX rate
RECENT FINANCINGS
Date
7/16/07
8/28/08
*
**
* Adjusted for subsequent 1-for-6 consolidation
* Units consisted of one share and one half warrant
** C$240 million in 8% convertible debentures, convertible at C$13.00
Source: Company reports, Bloomberg, TD Securities.
Proceeds
(C$mm)
$440.30
$228.35
2015E
182,058
4,572
INSIDER OWNERSHIP
Management
Management & Directors
2012
$112.02
$94.14
2013
$108.68
$98.00
2014E
2015E
2.1
1.9
7.4
8.4
3.0
2.6
$55,308 $43,939.37
Proforma
416.6
641.0
$18.37
$11.94
2014E
$105.00
$92.50
(nominal)
(US$/C$)
2015E
$100.00
$90.00
10.0%
0.9700
BASIC
1%
4%
f.d.
4%
9%
Action Notes
January 21, 2014
Equity Research
39 of 61
International E&P Sector Outlook for 2014
Jamie Somerville
Including Take-Aways from Our London Energy Conference
Political Events Worth Watching
Shahin Amini
London Energy Conference key Take-Aways
On January 13-15, TD hosted its annual London Energy Conference with 17 Canadalisted International E&Ps presenting. Our key takeaways are as follows:

Positive institutional interest: Our conference was attended by over 100
institutional investors. The amount of time these institutional investors are
spending talking to companies keeps increasing, with the total number of “1-on1 meetings” up 13% year-over-year. We believe this is in part due to speculative
and momentum-seeking investors being replaced by more value-seeking and
longer-term focused investors (which aim for greater understanding of company
details).

Medium-sized Companies Moving into Big Leagues Are Our Top Picks:
Buy-side interest in larger-cap International E&Ps (over $1 billion market cap)
increased by 60% year-over-year (to match demand for the Canadian senior
producers that was up >20%), while smaller-cap International E&Ps saw
effectively no growth in (limited) interest. We believe that investor interest in
small-cap International E&Ps should eventually recover (and the significant
increased demand for meetings with large-cap International E&Ps could be a
leading indicator). However, we are unwilling to predict when the recovery will
occur. We continue to like companies with relatively predictable growth, that are
in the process (or on the cusp of) breaking through the $1 billion market cap
range, including our two Action List BUY rated stocks, Bankers Petroleum
(BNK-T) and Parex Resources (PXT-T).

The likelihood of consolidation and M&A in the International E&P sector
continues to appear high, predominantly due to depressed valuations and
significant cash balances being built in producing companies. However,
management teams and investors have a cautious outlook on M&A activity due
to the inherent unpredictability of deal-making. Corporate take-outs of
companies with diverse asset bases are seen as unlikely by many, with buyers
likely choosing specific assets while avoiding potential liabilities in others.
Exploration farm-outs may remain the most common deal form. However,
corporate consolidation should not be ruled out, particularly in the mid- and
small-cap Colombia-focused E&Ps where 1) many companies have overlapping
or adjacent block interests and the synergies of some potential corporate mergers
appear relatively obvious, and 2) some significant take-outs have already
occurred in 2012/13.
Action Notes

January 21, 2014
Equity Research
40 of 61
Management teams remain generally optimistic about the outlook for the sector and their businesses, but
remain cautious with regard to financing (where needed) and issuing guidance. Most International E&Ps
that presented at our conference indicated or hinted at an expectation for both reserve growth in
upcoming reserve reports and production growth year-over-year in 2014. Oil prices remain high, which
is allowing strong cash flow generation in many cases. However, with another year of “challenging
capital markets” for International E&Ps having passed, management teams have tailored the message.
Phrases like “conservative and sustainable capital management” seem to have replaced “value creation,
growth and upside potential” in management’s presentations over the last few years. We believe that
most management teams are determined to set achievable production targets for 2014 to please investors
that want to avoid companies that could “disappoint the market”. Those companies that do not appear
capable of self-funding their operations from production continue to spend significant parts of their
presentations explaining how they plan to mitigate financing risk.
Sector Outlook for 2014
Canadian-listed International E&Ps have generated limited share price appreciation (or dividends) for investors
in recent years, despite sustained high Brent oil prices (the key commodity for most International E&Ps) and in
some cases significant reserve additions. However, 2013 finally saw share prices increasing moderately (7%
on average) and valuation multiples improving slightly (starting in H2/13). At 0.50x Fully-risked NAVPS on
average, the sector has risen off its lows set during 2011-2013. Nonetheless, in our opinion, it remains well
below long-term averages of 0.60x-0.70x and historic high valuations of 0.80-0.90x (see Exhibit 1). We also
believe International E&P valuations are still very attractive compared to Canadian domestic E&Ps at 0.701.00x on average.
We are hopeful that positive momentum in International E&Ps could accelerate in 2014. The market has
recently shown itself willing to pay up for new discoveries and growing production, as evidenced by top
performers in 2014 including Africa Oil (AOI-V), BNK Petroleum (BKX-T), Canacol Energy (CNE-T),
Gran Tierra Energy (GTE-T) and Iona Energy (INA-V). A significant positive sector re-rating is also
possible, in our view, dependent on large-scale operational success or M&A, although we consider such events
as less likely.
Political Events Worth Watching
We expect share price performance for International E&Ps to be driven by macro factors including funds
flows, market risk tolerance and commodity prices, as well as stock specific operational events (in particular
exploration and development drilling results).
However, we also note a number of potential political events worth watching:
Elections could be positive:
National elections in 2014 could be important to the outlook for companies operating in Colombia and India,
with both elections expected to be held in or around May. In both cases we are hopeful for stocks including
Canacol Energy (CNE-T), Niko Resources (NKO-T), Pacific Rubiales (PRE-T), Parex Resources (PXTT), Petroamerica (PTA-V) and Petrodorado (PDQ-V), as we believe that the most likely election winners
(according to current polls) would be viewed positively by investors.
We also view the geo-political momentum as being potentially positive for those companies active in Egypt
and the Kurdistan region of Iraq including TransGlobe Energy (TGL-T) and WesternZagros Resources
(WZR-V) respectively.
We believe that the outcome currently considered most likely by pollsters in the referendum on potential
Scottish Independence (a no vote leaving the United Kingdom united for at least the foreseeable future) would
January 21, 2014
Equity Research
Action Notes
41 of 61
likely reduce uncertainty and be welcomed by markets. The vote is scheduled for September, and should be
viewed as relevant to Iona Energy (INA-V), Sterling Resources (SLG-V) and Xcite Energy (XEL-V).
Protests are unpredictable (and rarely positive in the short term): However, unscheduled political events,
including street protests, appear to have become common in many parts of the world this decade. The
Economist Intelligence Unit sees only 6 out of 150 countries analyzed as having very low risk of social unrest
in 2014 (of those six countries only Norway and Denmark have meaningful oil and gas investment potential).
In contrast, it views 119 countries as having medium to very high risk of social unrest. Multiple countries in
which some of our International E&Ps have assets were assessed to have very high risk of social unrest,
including Argentina, Bangladesh, Egypt, Iraq, Tunisia and Yemen. We assume that markets have already
at least partially priced in some of these risks, but that only time will tell whether the market is too
optimistic/pessimistic in specific areas.
Exhibit 1. International E&P Sector Valuation Trends, P/Fully-risked NAVPS
0.95x
0.85x
0.75x
0.65x
0.55x
0.45x
0.35x
0.25x
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
P/Fully-risked NAVPS
Source: TD Securities Inc. Estimates
Apr-12
Max
Aug-12
Min
Dec-12
Apr-13
Average
Aug-13
Dec-13
$9.51
$1.70
$4.61
$1.56
$6.68
$1.41
$7.73
$0.60
$20.33
$2.60
$17.93
$7.24
$0.33
$0.06
$0.71
$0.86
$9.09
$1.07
$1.89
Ticker
AOI
BOE
BNK
BKX
CNE
CKE
GTE
INA
LUP
NKO
PRE
PXT
PTA
PDQ
SLG
TNP
TGL
WZR
XEL
Africa Oil Corp.
Americas Petrogas Inc.
Bankers Petroleum Ltd.
BNK Petroleum Inc.
Canacol Energy Ltd.
Chinook Energy Inc.
Gran Tierra Energy Inc.
Iona Energy Inc.
Lundin Petroleum AB
Niko Resources Ltd.
Parex Resources Inc.
Petroamerica Oil Corp.
Petrodorado Energy
Sterling Resources Ltd.
TransAtlantic Petroleum Ltd.
TransGlobe Energy Corp.
WesternZagros Resources Ltd.
Xcite Energy Ltd.
AOI
BOE
BNK
BKX
CNE
CKE
GTE
INA
LUP
NKO
PRE
PXT
PTA
PDQ
SLG
TNP
TGL
WZR
XEL
SA
JS
JS
JS
JS
SA
JS
SA
SA
JS
JS
JS
JS
JS
SA
JS
SA
SA
SA
Analyst
SPEC
SPEC
HIGH
SPEC
HIGH
SPEC
HIGH
HIGH
HIGH
SPEC
HIGH
HIGH
HIGH
SPEC
SPEC
HIGH
HIGH
SPEC
SPEC
Risk
$23,734
$2,943
$362
$1,173
$225
$579
$302
$2,189
$220
$6,463
$183
$5,819
$784
$192
$27
$220
$321
$672
$508
$552
Market Cap.
($mm)
$13.50
$4.00
$6.50
$3.00
$8.50
$1.35
$9.00
$1.40
$25.00
$8.00
$26.00
$11.00
$0.50
$0.15
$1.20
$2.00
$12.00
$1.75
$2.50
Target
Price
76.3%
42.0%
135.3%
41.0%
92.3%
27.2%
nmf
16.4%
133.3%
23.0%
207.7%
48.7%
51.9%
51.5%
172.7%
69.0%
132.6%
32.0%
63.6%
32.3%
$14.72
nmf
$27.68
$5.09
$3.72
$19.94
$7.10
$25.88
$11.63
nmf
$3.43
$12.45
$32.93
$31.66
nmf
$11.78
$15.63
$9.54
nmf
$2.27
EV/BOE *
(2P)
Proforma
328,802
2,003
18,173
806
10,611
10,169
29,489
2,184
33,054
19,400
158,338
15,856
5,637
4,780
18,304
408,622
3,114
21,322
2,348
14,322
11,104
31,119
6,934
40,200
21,513
197,172
19,867
5,367
59
4,822
6,354
20,808
2,198
508,716
4,568
24,934
4,133
17,344
14,442
36,775
4,964
76,892
19,707
229,449
23,840
5,685
388
5,703
8,273
25,884
5,734
-
Production est. (BOE/d)*
2013E
2014E
2015E
3.7%
-
Yield
Total
Return
to Target
$88,324
nmf
$174,255
$43,800
$139,323
$63,054
$30,908
$54,690
$209,659
$259,512
$26,792
$64,619
$39,549
$25,529
nmf
nmf
$83,970
$20,874
nmf
nmf
2013E
$0.65
$0.19
$7.13
$0.34
$4.18
$0.81
$5.22
$1.41
$5.02
$6.78
$19.72
$5.91
$0.28
$0.02
$1.46
$1.59
$9.37
$0.14
$3.33
$89,899
nmf
$140,809
$51,697
$110,454
$47,427
$35,932
$62,600
$47,773
$206,235
$27,634
$46,773
$39,356
$24,403
$277,608
$75,601
$60,669
$18,509
$254,807
nmf
EV/BOEPD*
2014E
1.82x
nmf
nmf
0.65x
4.60x
1.60x
1.74x
1.48x
0.43x
4.05x
0.38x
0.91x
1.22x
1.17x
2.60x
0.49x
0.54x
0.97x
7.51x
0.57x
Base NAVPS
Estimate
Multiple
Source: Bloomberg, Company Reports, TD Securities.
$56,893
nmf
$113,033
$38,600
$66,803
$38,104
$21,547
$46,679
$85,144
$111,338
$44,342
$37,417
$23,259
$13,765
$123,926
$59,567
$42,380
$10,406
$90,865
nmf
2015E
$18.06
$8.19
$8.28
$4.77
$10.60
$1.81
$9.92
$1.68
$26.56
$19.82
$29.13
$11.77
$0.50
$0.30
$1.71
$2.71
$15.15
$2.26
$3.45
5.0x
nmf
9.5x
2.7x
nmf
5.6x
3.7x
4.0x
11.9x
8.2x
4.5x
4.6x
2.3x
1.2x
nmf
nmf
4.9x
2.5x
nmf
nmf
2013E
0.50x
0.53x
0.21x
0.56x
0.33x
0.63x
0.78x
0.78x
0.36x
0.77x
0.13x
0.62x
0.61x
0.65x
0.19x
0.42x
0.32x
0.60x
0.47x
0.55x
Fully Risked NAVPS
Estimate
Multiple
4.1x
nmf
8.5x
3.1x
9.3x
4.2x
3.9x
4.2x
1.4x
6.6x
3.6x
3.0x
2.6x
1.5x
nmf
3.7x
3.5x
2.2x
nmf
nmf
EV/DACF
2014E
$82.05
$42.40
$14.09
$22.46
$31.10
$3.75
$24.71
$1.84
$43.14
$48.61
$80.38
$23.19
$0.66
$2.57
$5.92
$11.34
$29.05
$4.50
$4.02
3.8x
nmf
6.6x
2.4x
4.7x
4.1x
1.7x
3.1x
2.5x
6.5x
5.8x
2.6x
1.6x
1.0x
9.0x
2.7x
2.5x
1.2x
5.9x
nmf
2015E
0.24x
0.12x
0.04x
0.33x
0.07x
0.21x
0.38x
0.31x
0.33x
0.47x
0.05x
0.22x
0.31x
0.50x
0.02x
0.12x
0.08x
0.31x
0.24x
0.47x
Unrisked NAVPS
Multiple
Multiple
January 21, 2014
Equity Research
https://www.tdsresearch.com/equities/welcome.important.disclosure.action
All $ figures in C$ unless noted.
Note: CNE and NKO: fiscal 2015E used as equivalent to calendar 2014E
* Production and reserves used are pre-royalty working interest estimates, excluding service contract volumes
This communication is intended for TD Securities equity research clients. For access to disclosure information please visit our website
SUM / AVERAGE
Company name
SPEC BUY
SPEC BUY
AL BUY
SPEC BUY
BUY
HOLD
HOLD
BUY
HOLD
SPEC BUY
BUY
AL BUY
BUY
SPEC BUY
SPEC BUY
BUY
BUY
SPEC BUY
HOLD
Rating
Ticker
AVERAGE
Recent
Price
17-Jan-14
Exhibit 2. Comparison Summary
Action Notes
42 of 61
Action Notes
January 21, 2014
Equity Research
43 of 61
Exhibit 3. Justification and Key Risks of Target Prices
Stock Name
Ticker
Exchange
Share Price
Target Price
Rating
Risk Justification of Target Price
Our target price for Africa Oil Corp.is based
on a combination of Base and Fully-risked
NAVPS. A x multiple is applied to our
estimate of Base NAVPS and a x multiple is
applied to our Upside to Base NAVPS.
Africa Oil Corp.
BNK Petroleum Inc.
AOI
BOE
BNK
BKX
V, SS
V
T, L
T
$9.51
$1.70
$4.61
$1.56
$13.50
$4.00
$6.50
$3.00
SPEC BUY
SPEC
SPEC BUY
Our target price for Americas Petrogas Inc.is
based on a combination of Base and Fullyrisked NAVPS. A 0.75x multiple is applied to
our estimate of Base NAVPS and a 0.5x
multiple is applied to our Upside to Base
SPEC NAVPS.
AL BUY
SPEC BUY
HIGH
Our target price for BNK Petroleum Inc.is
SPEC our estimate of Base NAVPS and a 0.6x
NAVPS.
Canacol Energy Ltd.
CNE
T, BVC
$6.68
$8.50
BUY
HIGH
Chinook Energy Inc.
CKE
T
$1.41
$1.35
HOLD
SPEC
GTE
T, N
$7.73
$9.00
HOLD
HIGH
Iona Energy Inc.
INA
V
$0.60
$1.40
BUY
HIGH
Lundin Petroleum AB
LUP
T, STO
$20.33
$25.00
HOLD
HIGH
Niko Resources Ltd.
NKO
PRE
PXT
PTA
T
T, BVC
T
V
$2.60
$17.93
$7.24
$0.33
Source: Company Reports, Bloomberg, TD Securities
$8.00
$26.00
$11.00
$0.50
SPEC BUY
BUY
AL BUY
BUY
Our target price for Bankers Petroleum Ltd.is
NAVPS.
HIGH
HIGH
The key near-term risks specific to Americas Petrogas are:
• A significant portion of our valuation is based on exploration potential.
• Significant financing risk.
• The quality, level of detail and timeliness of company disclosures are below average compared with other
companies in our coverage.
• Market valuation appears to already be factoring in significant potential for exploration success in the company’s
unconventional blocks.
• Country risk in Argentina, including potential for continued price controls and government regulations.
• Significant potential for extended exploration and development timelines due to limited availability of key service
equipment and regulatory permitting requirements.
The key near-term risks specific to Bankers are:
• Downside risk in a lower heavy oil price environment.
• Availability of processing and export infrastructure, including delays in developing infrastructure, is a considerable
risk, and could delay production growth.
• Higher than average geo-political risk.
The key near-term risks specific to BNK Petroleum are:
• Exploration and appraisal risk, which makes cost and timelines required to develop shale gas in Europe highly
uncertain.
• The shale gas market in Europe is far less developed than in North America and may attract restrictions or
legislation that erode our forecast economics.
Our target price for Canacol Energy Ltd. is
NAVPS.
The key near-term risks specific to Canacol are:
• A significant portion of our valuation is based on exploration potential.
• Higher than average security risk in the Caguan-Putumayo Basin.
• Significant financing risk.
Our target price for Chinook Energy Inc.is
NAVPS.
Our target price for Gran Tierra Energy Inc.is
NAVPS.
Our target price for Iona Energy Inc.is based
on a combination of Base and Fully-risked
NAVPS. A 0.85x multiple is applied to our
estimate of Base NAVPS and a 0.7x multiple
is applied to our Upside to Base NAVPS.
The key-near term risks specific to Chinook are:
• Reservoir performance and exploration risks are significant.
• Political uncertainty is very high in Tunisia and any downturn in the security or political situation could have a
negative impact on Chinook.
• Potential regulatory delays in Tunisia are a risk, in our view.
The key near-term risks specific to Gran Tierra are:
• Environmental and social objections to the development of possible discoveries that could be particularly relevant in
Peru.
• Higher than average security risk in the Putumayo Basin.
Key risks specific to Iona are:
• Reservoir performance risks are significant. Iona’s assets are small satellite fields and there is no certainty that
actual production will be as planned and there is less scope for intervention in case of problems.
• Project development risks are significant. Most of our valuation is based on undeveloped assets.
• Partner and third-party risks. Iona is dependent on third-party operated infrastructure and performance for its future
production and there could be issues outside the control of the company that adversely affect production and
revenues.
Key risks specific to Lundin are:
Our target price for Lundin Petroleum ABis
• Appraisal risk. Lundin’s net reserves from Johan Sverdrup are uncertain, and there is no guarantee that unitization
based on a combination of Base and Fullyrisked NAVPS. A 1x multiple is applied to our 2P volumes will be the same as current guidelines. It is possible that 2P volumes will be less or greater than the
estimate of Base NAVPS and a 0.9x multiple midrange.
• Project development risks are significant. Most of our valuation is based on undeveloped assets.
is applied to our Upside to Base NAVPS.
• International competition for oil & gas services and equipment has intensified over the last few years, and there is
appreciable risk of critical items and services being delayed.
• Partner and operator risks. The company does not have full control of the project schedule and budget for its main
asset, the Johan Sverdrup oil field development.
• Substantial influence by the major shareholder. The Lundin family can significantly influence the affairs of the
corporation and there is the risk that future decisions could disadvantage minority shareholders.
Our target price for Niko Resources Ltd.is
SPEC our estimate of Base NAVPS and a 0.4x
NAVPS.
HIGH
The key near-term risks specific to Africa Oil are:
• As an exploration-focused company with no 2P reserves, Afica oil is exposed to significant geological risk with no
guarantee that future exploration expenditures will result in commercial discoveries.
• The company's political and security risks are higher than the average for our international E&P coverage universe.
• Financial risks for the company are high. Although Africa Oil is expected to be fully funded for its 2013 drilling
program, future exploration and project developments may result in equity dilution. exploration and project
development may also be at risk of a delay or loss of interest if sufficient funding is not available.
• In our view fiscal risk is high. We believe there is a risk that future legislation changes may aversely impact the
company's projects. Also, the company has not disclosed the terms of its PSCs given the government's desire that the
terms remain confidential and this adds an extra element of forecasting risk.
The key near-term risks specific to Niko are:
• Higher than average geo-political, fiscal and legal risks: Niko is in dispute over taxation and other payments with
both Indian and Bangladeshi authorities, and has been fined for attempted corruption under Canadian law. We have
generally assumed that any future legal rulings will be in Niko’s favor or negligible to valuation.
• Exploration risk is relatively high.
• Financing risk is high.
Our target price for Pacific Rubiales Energy
Corp.is based on a combination of Base and
Fully-risked NAVPS. A 0.9x multiple is
applied to our estimate of Base NAVPS and a
0.85x multiple is applied to our Upside to
Base NAVPS.
Key risks specific to Pacific Rubiales are:
• Reserves risk, in particular related to the expiry of the company’s main producing contract in 2016.
• Potential infrastructure constraints also present a significant risk.
• Commodity price risk is potentially exacerbated by Pacific Rubiales’ exposure to heavy oil differentials and its oil
trading activities.
• The company has entered into a number of transactions, including a $140 million investment in Pacific Infrastructure
(private), disclosure for which appears to raise as many questions as it does answers as it relates to corporate
governance.
Our target price for Parex Resources Inc. is
NAVPS.
Our target price for Petroamerica Oil Corp.is
NAVPS.
Key risks specific to Parex are:
The key near-term risks specific to Petroamerica are:
• Country risk is relatively high. Political risk is relatively low, in our opinion, but security risks are high and permitting
delays have caused a slowdown in overall activity levels. In addition, a strong local currency could create at least
some cost inflation.
• Exploration risk is relatively high. Due to relatively high expected natural decline rates, business sustainability likely
depends on continued exploration success (and/or acquisitions). The potential for operational delays, including those
caused by regulatory issues or a relative lack of service equipment in Colombia, appears relatively high.
• All of Petroamerica’s assets are non-operated, which results in management having less control of the company’s
operations than other Colombia-focused companies in our coverage
Action Notes
January 21, 2014
Equity Research
44 of 61
Exhibit 3. Justification and Key Risks of Target Prices (continued)
Stock Name
Ticker
Exchange
Share Price
Target Price
Rating
Petrodorado Energy
PDQ
V
$0.06
$0.15
SPEC BUY
SLG
V
$0.71
$1.20
SPEC BUY
Xcite Energy Ltd.
TNP
TGL
WZR
XEL
T, N
T, N
V
V
$0.86
$9.09
$1.07
$1.89
Source: Company Reports, Bloomberg, TD Securities
$2.00
$12.00
$1.75
$2.50
BUY
BUY
SPEC BUY
HOLD
Risk Justification of Target Price
Our target price for Petrodorado Energyis
SPEC
NAVPS.
Key risks specific to Petrodorado are:
• A relatively low proportion of the company’s assets being operated implies significant control risk. When added to
the very limited near-term cash flow expectations, this contributes to considerable financial risk.
SPEC
HIGH
HIGH
Our target price for Sterling Resources Ltd.is
NAVPS.
Our target price for TransAtlantic Petroleum
Ltd.is based on a combination of Base and
applied to our estimate of Base NAVPS and
a 0.7x multiple is applied to our Upside to
Base NAVPS.
Key risks specific to Sterling are:
• Exploration risk. The company is exposed to exploration and appraisal programs in the North Sea and offshore
Romania. There is no certainty that these campaign will result in commercial developments.
• Project development risks. Sterling is likely to be involved in offshore development projects, and is exposed to
project development risks, with the potential for cost overruns and delays causing loss of revenue.
Our target price for TransGlobe Energy
Corp.is based on a combination of Base and
applied to our estimate of Base NAVPS and
a 0.75x multiple is applied to our Upside to
Base NAVPS.
Key risks specific to TransGlobe are:
• Geologic-exploration risk is significant.
• Political uncertainty is very high in Egypt and Yemen, and any downturn in the security or political situation could
have a negative impact on TransGlobe.
• Potential regulatory delays in Egypt are a risk, in our view.
• Further delays in collecting revenues from the Egyptian government are a risk.
Key risks specific to TransAtlantic are:
• Financing, exploration and liquidity risk are relevant to TransAtlantic.
• Potential for significant influence - Malone Mitchell owns just under 50% of the basic outstanding shares of the
company.
• Higher than average geo-political risk. Despite being a secular democratic republic, political risk in Turkey is
considerable.
Our target price for WesternZagros
Resources Ltd.is based on a combination of
Base and Fully-risked NAVPS. A 1x multiple
SPEC is applied to our estimate of Base NAVPS
and a 0.75x multiple is applied to our Upside
to Base NAVPS.
Key risks specific to WesternZagros are:
• Geologic-exploration risk is significant. Our NAVPS is entirely based on working capital and exploration (and
appraisal) prospects, as the company has no booked reserves.
• Political and legal uncertainty is very high in Kurdistan and any downturn in the security or political situation could
have a negative impact on WesternZagros.
• Fiscal risk is very high; a legal and fiscal framework is yet to be ratified by the federal government.
• Technical challenges related to complex drilling in fractured carbonates.
Our target price for Xcite Energy Ltd. is
SPEC
NAVPS.
Key risks specific to Xcite are:
• Project development risks are significant.
• Funding risk. The company may require further funding if it chooses to proceed with the development on a
substantial shareholding or if it is unsuccessful in securing a favourable asset divestment.
• Fiscal risk is very high; a legal and fiscal framework is yet to be ratified by the federal government.
• Technical challenges related to complex drilling in fractured carbonates.
Recommendation:
SPEC. BUY
Unchanged
Risk:
Action Notes
January 21, 2014
Equity Research
Jamie Somerville
45 of 61
SPECULATIVE
C$3.00
C$2.75
Prior:
12-Month Dividend:
C$0.00
92.3%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
EV ($mm)
Current Dividend
Dividend Yield
$1.56
$0.45-$1.98
$242.0
$225.3
$169.6
--486435
BNK Petroleum Inc.
(BKX-T) C$1.56
Neutral Market Reaction to Significantly Reduced Costs
Event
Last week, BNK Petroleum Inc. (BKX-T) announced an update for its
operations in Oklahoma and Poland.
Impact: SLIGHTLY POSITIVE.
Financial Data (C$)
Fiscal Y-E
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
December
155.1
144.4
125.5
($55.7)
nmf
Estimates (US$)
Year
CFPS (f.d.)
CFPS (f.d.)(old)
Oil (b/d)
Gas (MMcf/d)
MBOE/d
2012A
(0.04)
-917
4.0
1.6
2013E
(0.07)
-546
1.6
0.8
2014E
0.18
0.17
1,666
4.1
2.4
2015E
0.38
0.37
3,197
5.6
4.1
CFPS (f.d.) Quarterly Estimates (US$)
Year
Q1
Q2
Q3
Q4
2012A
(0.01)
(0.01)
0.00
(0.01)
2013E
0.00
(0.06)
(0.01)
0.01
2014E
0.03
0.04
0.05
0.06
2015E
0.08
0.09
0.10
0.11
2013E
nmf
2014E
9.1x
2015E
4.6x
Valuations
Year
EV/DACF
2012A
nmf
Year
WTI (US$/bbl)
Base NAVPS
Risked NAVPS
2012A
$94.14
---
2013A 2014E
$98.00 $92.50
-- C$0.34
-- C$4.77
2015E
$90.00
---
Details and Outlook
Oklahoma: Exhibit 1 shows new test data compared to previous well tests in
the Caney shale oil play. 30-day production tests from the Barnes 7-2H well
appear to confirm that targeting the lower Caney can produce higher oil rates
and lower decline rates (than previous wells targeting the Transition zone).
Initial test rates from the most recently drilled and completed well (Wiggins
12-8H) are significantly lower than initial rates from the Barnes 7-2H well,
but this can easily be explained by a technical issue caused by BNK’s
continued trialing of new drilling and completion techniques (that are yielding
significant cost reductions). As a result of those technical issues, only 2,600
feet of lateral was effectively stimulated (roughly half that stimulated in prior
and planned future wells in the play). On a bbl/d per frac stage basis, the
Wiggins 12-8H has, in our view, demonstrated repeatability of the positive
results achieved with the Barnes 7-2H.
We view a significant reduction in drilling days required to drill the next well
that has recently reached TD, Leila 31-2H, as the most positive part of last
week’s update. Predominantly as a result of this achievement, BNK believes it
has now effectively tested all the techniques it needs to deliver drilling and
completion costs of $8 million per well going forward. Although this is in line
with a prior target (issued in October) of reducing costs from $11 million to
$7-9 million, we are positively surprised that BNK has been able to achieve
the targeted 27% cost reduction after just a few wells. As a result, our
conviction that BNK has unlocked a commercially attractive new shale oil
play is increased. We are increasing our target price to C$3.00 (from C$2.75),
and given a neutral market reaction to the update, our attraction to BNK’s
shares is increased.
Company Profile
BNK Petroleum (established in mid-2008) is
an E&P company focused on leveraging its
experience of developing US unconventional
oil and gas plays. In 2009, BNK announced it
would be expanding to develop a portfolio of
shale gas opportunities in Europe (BNK
currently has concessions in the U.S., Poland,
Germany and Spain).
BKX-T: Price
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
2011
2012
2013
0
2014
January 21, 2014
Equity Research
Action Notes
46 of 61
Poland: BNK Petroleum has now initiated the drilling of a horizontal sidetrack to the Gapowo B-1 well, which
is expected to take 30 days to drill. We expect subsequent fracture stimulation could yield critical test results
by early Q2/14.
Exhibit 1. BNK Petroleum: Caney Horizontal Well Results Comparison
Barnes 6-2
Dunn 2-2H
Hartgraves 5-3H
Barnes 7-2H
30-day IP rates
Announced
IP rate (BOEPD)
IP rate (bbl/d oil)
% oil
IP rate (bbl/d oil /frac stage)
Days on production for IP
8-Aug-13
200
93
47%
7.8
30
2-Oct-13
420
195
46%
13.0
30
5-Nov-13
748
388
52%
12.9
30
15-Jan-14
520
406
78%
15.0
30
Early Flowback IP rates
Announced
IP rate (BOEPD)
IP rate (bbl/d oil)
% oil
IP rate (bbl/d oil /frac stage)
Days on production for IP
18-Jul-13
n/a
120
n/a
10.0
"Peak"
8-Aug-13
620
300
48%
20.0
"Peak"
2-Oct-13
1,200
585
49%
19.5
4
9-Dec-13
750
520
69%
19.3
4 or more
n/a
23%
32%
35%
38%
34%
31%
22%
2-week decline (BOE)
2-week decline (Oil)
Wiggins 12-8H
15-Jan-14
420
300
71%
18.8
Note: Italicized numbers are reliant on TD estimates of undisclosed lateral lengths and number of frac stages.
Source: BNK Petroleum
Exhibit 2. BNK Petroleum: Caney Horizontal Well Drilling Days Progression
Source: BNK Petroleum
What should we expect from upcoming reserves report? We expect first significant reserve bookings for
the Caney play to be announced in March, but have so far not included any potential reserves from future
drilling locations in our Base NAVPS. How many probable future drilling locations reserve engineers are
likely to assume is, in our view, very difficult to predict. We assume that reserve engineers could allocate
anything from 7 to 100 probable well locations, which could yield 2P reserves of 10-100 mmBOE (70% or
more oil). We would view 2P reserves above 30 mmBOE as clearly positive, but would not be disappointed
with 10-30 mmBOE. As long as independent engineers certify reserves implying expected ultimate recovery
(EUR) per future location of 0.3-0.5 mmbbl (excluding gas and NGLs), we would assume relatively low
reserve bookings this year would simply increase reserve booking potential in future years. That said, higher
reserve bookings would be preferable, as this would increase BNK’s potential to accelerate development with
the use of reserves based debt.
January 21, 2014
Equity Research
Action Notes
47 of 61
Exhibit 3. BNK Petroleum: TD Securities Estimate Changes
Q3/13A
Q4/13E
New
2013E
Old
% Chg
New
2014E
Old
% Chg
Production (BOE/d)
% Natural Gas
302
41%
996
39%
806
32%
806
32%
-
2,348
29%
2,435
30%
(4%)
(2%)
Financial ($mm)
Cash Flow
Capex
Ending Net Cash / (Debt)
($2)
$35
$54
$1
$17
$38
($10)
$63
$38
($10)
$63
$38
nmf
-
$27
$98
($33)
$26
$98
($35)
6%
(5%)
-$0.01
$0.01
-$0.07
-$0.07
nmf
$0.18
$0.17
6%
$ 73.04
($13.66)
19%
($9.04)
$50.34
$ 67.40
($12.54)
19%
(11.14)
$43.73
CFPS - f.d.
Netbacks ($/BOE)
Revenue
Royalties
% Revenue
Opex
Operating Netback
Base NAVPS
Fully-risked NAVPS
$ 49.26 $49.26
($9.20)
($9.20)
19%
19%
($10.65) ($10.65)
$29.41
$29.41
-
$ 65.70 $61.44
($12.22) ($11.43)
19%
19%
($8.40) ($8.43)
$45.07
$41.57
7%
7%
0%
(0%)
8%
C$0.34
C$4.77
22%
5%
C$0.28
C$4.56
Source: TD Securities, Company reports
We now assume slightly more 2P reserves for the Barnes 7-2H (due to lower initial decline rates exhibited
relative to previous wells) and Wiggins 12-8H wells, increasing our Base NAVPS estimate. Our Fully-risked
NAVPS estimate is also slightly increased by positive adjustments to our drilling and completion cost
assumptions for future wells.
January 21, 2014
Equity Research
Action Notes
48 of 61
Valuation
BNK currently trades at a significant premium to the average for other International E&Ps in our coverage on
Base NAVPS, but at a significant discount on Fully-risked NAVPS.
Exhibit 4. BNK Petroleum: Relative Valuation
Fully-risked NAVPS
Base NAVPS
2014E EV/DACF*
Recent
Price
Ticker
Current
Estimate
Current
Current
Multiple
Multiple
17-Jan-14
Estimate
Multiple
AOI
C$9.51
C$18.06
0.53x
C$0.65
nmf
nmf
BOE
C$1.70
C$8.19
0.21x
C$0.19
nmf
8.5x
BNK
C$4.61
C$8.28
0.56x
C$7.13
0.65x
3.1x
CNE
C$6.68
C$10.60
0.63x
C$4.18
1.60x
4.2x
CEN
C$18.81
C$37.62
0.50x
C$23.14
0.81x
3.3x
CKE
C$1.41
C$1.81
0.78x
C$0.81
1.74x
3.9x
GTE
C$7.73
C$9.92
0.78x
C$5.22
1.48x
4.2x
INA
C$0.60
C$1.68
0.36x
C$1.41
0.43x
1.4x
LUP
C$20.33
C$26.56
0.77x
C$5.02
4.05x
6.6x
NKO
C$2.60
C$19.82
0.13x
C$6.78
0.38x
3.6x
PXT
C$7.24
C$11.77
0.61x
C$5.91
1.22x
2.6x
1.5x
PTA
C$0.33
C$0.50
0.65x
C$0.28
1.17x
PDQ
C$0.06
C$0.30
0.19x
C$0.02
2.60x
nmf
SLG
C$0.71
C$1.71
0.42x
C$1.46
0.49x
3.7x
TNP
C$0.86
C$2.71
0.32x
C$1.59
0.54x
3.5x
TGL
C$9.09
C$15.15
0.60x
C$9.37
0.97x
2.2x
WZR
C$1.07
C$2.26
0.47x
C$0.14
nmf
nmf
XEL
C$1.89
C$3.45
0.55x
C$3.33
0.57x
nmf
1.25x
4.8x
4.60x
9.3x
Average
BKX
0.50x
C$1.56
C$4.77
0.33x
C$0.34
Source: TD Securities, Company reports
Our target price is based on a combination of 0.90x Base NAVPS and 0.60x Upside to Base NAVPS. The
latter multiple is below the average used for our coverage of International E&Ps (we currently use a range of
0.35x–0.95x for other International E&Ps) due to what we view as significant longer-term financing risk and
the potentially long lead times required to de-risk and develop unconventional resources in Europe.
and environmental and weather concerns.
The key near-term risks specific to BNK are:

Exploration and appraisal risks, which make cost and timelines required to develop shale assets highly
uncertain.

The shale gas market in Europe is far less developed than in North America and may attract restrictions
or legislation that erode our forecast economics.
Action Notes
January 21, 2014
Equity Research
49 of 61
We are encouraged by results from drilling and completions in BNK Petroleum’s Caney Shale Oil play in
Oklahoma. Regarding its most recent update issued last week, we view a significant reduction in days required
to drill its most recent well as a noteworthy positve, which means BNK can now likely deliver on its targeted
27% reduction in drilling and completion costs (and average around $8 million per well going forward). We
are now confident that BNK has a highly commercial oil shale play in Oklahoma and note potential for
indicative economic inputs (flow rates, decline rates and costs) to improve further yet. Further test results are
expected over coming months, and we expect significant reserve bookings at year-end.
Exploration in Poland’s Baltic Basin shale plays is still very much in its infancy, and we believe that upside
potential remains large, with critical new test results now likely by early Q2/14. We believe that the market has
significantly underestimated the technical merits of BNK’s lands in Europe (but we note the plays there remain
very early stage and high risk).
Due to what we view as significant additional upside potential from ongoing drilling and testing as well as
attractive valuation on Fully-risked NAVPS, we maintain our SPECULATIVE BUY rating.
Action Notes
January 21, 2014
Equity Research
50 of 61
Exhibit 5. BNK Petroleum: Summary
BNK Petroleum Inc.
BKX
TSX-T
Price
C$1.56
Basic S/O (mm)
f.d. S/O (mm)
Net debt / (Net cash), (C$mm)
144.4
155.1
$225.3
($55.7)
$169.6
Post-tax PV
COS
Poland
USA
Germany
2P
2P
2P
Risked
mmBOE
2.3
-
Total 2P Reserves
$mm
$0.0
$67.9
$0.0
C$/sh
$0.00
$0.46
$0.00
2.3
$67.9
$0.46
57.6
$0.37
-$33.0
$4.4
$11.0
$50.4
-$0.22
$0.03
$0.07
$0.34
4.60
56.4
42.4
9.7
12.0
$224.5
$354.4
$48.6
$48.7
$1.59
$2.52
$0.35
$0.35
Total Resource
120.6
Discounted G&A
Fully Risked NAV
180.8
$676.2
-$2.8
-$52.3
$671.5
$4.80
-$0.02
-$0.37
$4.77
0.33
$3,376.5
$8.2
$3,380.0
$22.44
$0.05
$22.46
0.07
Net cash/(debt)
Base NAV
P / Base NAVPS
Poland
USA
Germany
Spain
60.3
Resource
Resource
Resource
Resource
Unrisked resource
Unrisked NAV
P / Unrisked NAVPS
815.9
876.2
AREAS OF OPERATION
Poland
USA
Mature
PRODUCTION (BOEPD)*
Poland
USA
SPEC BUY
SPEC
C$3.00
0%
92%
31-Dec
Q3/13
2012
0
1,580
2013E
0
806
2014E
0
2,348
2015E
0
4,133
Total
1,580
806
of which gas (%)
42%
32%
* includes risked resources and exploration potential
2,348
29%
4,133
23%
FINANCIAL SUMMARY
Cash Flow ($mm)
CFPS - Basic
CFPS - f.d.
Net Income ($mm)
EPS - Basic
EPS - f.d.
Revenue* ($/BOE)
* net of royalties and hedging
2012
($6.18)
($0.04)
($0.04)
($14.95)
($0.10)
($0.10)
$33.41
$10.38
$23.04
2013
($9.86)
($0.07)
($0.07)
($10.65)
($0.07)
($0.07)
$77.91
$10.65
$29.41
2014E
$27.18
$0.19
$0.18
$6.93
$0.05
$0.05
$55.16
$8.40
$45.07
2015E
$57.05
$0.39
$0.38
$16.80
$0.12
$0.11
$54.14
$7.79
$45.04
CAPITAL STRUCTURE
Market Cap. ($mm)
Net Debt ($mm)
Capex ($mm)
2012
144.3
144.3
$150
$31
$181
$41
(4.9)
2013E
144.4
146.7
$147
($38)
$109
$63
3.8
2014E
144.4
148.6
$215
$33
$248
$98
1.2
2015E
144.4
148.6
$215
$49
$264
$73
0.9
2012
nmf
nmf
nmf
$114,418
2013E
nmf
nmf
nmf
$135,307
2014E
8.3
nmf
9.1
$105,450
2015E
3.9
13.4
4.6
$63,838
RESERVES
2012
Proved* (mmBOE)
28.9
2P* (mmBOE)
44.7
$64.2
EV/BOE (Proved, $/BOE)
EV/BOE (2P,$/BOE)
* Evaluated by MHA Petroleum Consultants, Inc.
Growth
Exploration
Price
(C$)
$1.85
$0.30
$1.25
$2.85
$2.54
# of Shares
(mm)
13.6
17.0
16.0
15.8
26.0
ASSUMPTIONS
Brent (US$/bbl)
WTI (US$/bbl)
Discount rate
Spot FX rate
RECENT FINANCINGS
Date
7/18/08
7/15/09
11/12/09
5/18/10
10/19/10
Risk
Target
Current yield
Fiscal Year-end
VALUATION METRICS
P/CF - f.d.
P/E - f.d.
EV/DACF
EV/BOEPD
Germany
Spain
Rating
Source: Company reports, Bloomberg, TD Securities.
Proceeds
(C$mm)
$23.65
$4.79
$18.80
$42.33
$62.08
INSIDER OWNERSHIP
Management
2012
$112.02
$94.14
Proforma
28.9
45.1
$5.70
$3.65
2013E
$108.68
$98.00
2014E
$105.00
$92.50
(nominal)
(US$/C$)
2015E
$100.00
$90.00
10%
0.97
BASIC
2%
13%
f.d.
4%
18%
Financial Services - Diversified
Financials
Recommendation:
Action Notes
January 21, 2014
Equity Research
Graham Ryding, CFA
Koki Akala, CFA (Associate)
51 of 61
HOLD
Unchanged
Risk:
HIGH
C$3.25
Unchanged
12-Month Dividend:
C$0.12
12.0%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
EV ($mm)
Current Dividend
Dividend Yield
$3.01
$2.21-$4.31
-$746.2
$527.6
$0.12
4.0%
309704
Financial Data (C$)
Fiscal Y-E
Float Shares (mm)
Net Cash ($mm)
Net Debt/Tot Cap
December
-247.9
-$218.6
--
Estimates (C$)
Year
EBITDA ($mm)
EBITDA (old)($mm)
EBITDA/Shr
EPS (f.d.)
EPS (f.d.)(old)
AUM ($mm)
2012A 2013E 2014E 2015E
59.6
27.9
38.8
61.8
-28.2
42.7
66.2
0.35
0.13
0.16
0.25
0.16
0.00
0.07
0.14
-0.00
0.07
0.14
9,931.0 7,020.0 8,060.0 9,343.0
Sprott Inc.
(SII-T) C$3.01
Updated Performance Fees and AUM for 2013 Year-End
Event - Sprott Inc. released preliminary assets under management (AUM) and
performance fees as of December 31, 2013. They were both largely in line
with our estimates.
Impact – NEUTRAL
AUM finished 2013 at $7.0 billion, which is down 29% year over year and
in line with our forecast. Precious metals weakness has been an overhang on
Sprott’s AUM and margins in 2013. The preliminary estimate for
performance fees for the year ended 2013 is estimated at $5.0 million,
which is modestly above our $4.2 million estimate.
We are maintaining our $3.25 12-month out target price and HOLD
rating. We see the potential for longer-term upside in Sprott’s shares, and
there are some encouraging signs around new product initiatives and a wellcapitalized balance sheet. However, we are cautious over the near-term given
Sprott is a turnaround story in our view, and we believe that patience will be
required before new initiatives gain traction and translate into material AUM
and earnings growth.
EPS (f.d.) Quarterly Estimates (C$)
Year
Q1
Q2
Q3
Q4
2012A
0.08
0.00
0.06
0.02
2013E
0.01
(0.04)
0.01
0.02
2014E
0.01
0.01
0.01
0.04
2015E
0.02
0.02
0.02
0.08
2013E
18.9x
nmf
2014E
13.6x
43.0x
2015E
8.5x
21.5x
Valuations
Year
EV/EBITDA
P/E (f.d.)
2012A
8.9x
18.8x
Details
Sprott has had performance fees under the $10 million mark for
three years in succession, which is well below its annual average of
$47 million since 2008 (see Exhibit 1). Sprott last paid out a special
dividend in early 2011, based off of $200 million in performance fees in
2010. We do not expect any special dividends until potentially early
2016, based off of our $24 million performance fee estimate in 2015.


A combination of underperformance relative to fund hurdles, as well
as loss carry forwards from previous years for some of Sprott’s
larger funds led to muted performance fees in 2013. Many of Sprott’s
larger funds have significant loss carry forwards, including the Sprott
Canadian Equity fund, Sprott Gold and Precious Minerals fund, Hedge
Fund L.P., and Hedge Fund L.P. II. See Exhibit 3 for an overview of
AUM and fund performance at the fund level.
Company Profile
Sprott Inc. (SII-T) is an independent money
manager with $7.0bln in assets under
management. It has a 26-year track record of
investment management services, and as an
asset manager since 2000. On May 15, 2008
Sprott closed an IPO (priced at $10) raising
$200mm for shareholders opting to sell; none
of the proceeds went to the company.
SII-T: Price
10
10
8
8
6
6
4
4
2
2011
2012
2013
2
2014
January 21, 2014
Equity Research
Action Notes

52 of 61
In our view, the potential for performance fees going forward will most likely come from Sprott’s
new strategies. This could act as somewhat of an overhang on performance fee leverage over the near to
medium term given new funds may take some time to scale before contributing meaningfully to
performance fees. New strategies include the Enhanced Long/Short hedge funds, Sprott’s Offshore funds
(Zijin Mining gold hedge fund and a South Korean private equity fund), and a Sprott Resource Lending
LP (currently being marketed to prospective investors).
Exhibit 1. Sprott: Performance Fees and Special Dividend per share (2008 – 2015E, $000s)
$200,054
$50,000
$45,000
$0.80
$0.70
$0.70
$40,000
$0.60
$35,000
$0.50
$30,000
$25,000
$0.40
$20,000
$15,000
$0.30
$0.15
$0.20
$10,000
$0.04
$5,000
$0.00
$0.00
$0.00
2011
2012
2013
$0
2008
2009
2010
Performance Fees $000s (LHS)
$0.00
$0.05
$0.10
$0.00
2014E
2015E
Special Dividend per share (related to calendar year) (RHS)
Source: Company reports and TD Securities Inc. estimates
Outlook
Exhibit 2. Sprott: Old and New Q4/13, 2013 – 2015 Estimates
Base management fees ($mm)
Performance fees ($mm)
Base EBITDA ($mm) 1
Base EBITDA Margin 1
Consolidated EBITDA ($mm) 2
Consolidated EBITDA Per Share 2
EPS (f.d.)
Operating EPS (f.d.) 3
Net Flows ($mm) 4
Average AUM ($b)
Ending AUM ($b)
Q4/13E
Old
New
$19.0
$19.0
$2.7
$1.9
$6.8
$7.7
26%
30%
$9.1
$9.3
$0.04
$0.03
$0.02
$0.01
$0.01
$0.02
$50
$50
$7.2
$7.2
$7.0
$7.0
2013E
Old
$85.9
$4.2
$35.9
30%
$28.2
$0.14
$0.00
$0.09
($343)
$8.5
$7.0
2014E
New
$85.9
$5.0
$35.1
29%
$27.9
$0.13
$0.00
$0.08
($343)
$8.5
$7.0
1
Base EBITDA excludes performance fees and related expenses and investment gains/losses, but includes resource lending income
2
Consolidated EBITDA includes investment gains/losses.
3
Operating EPS excludes performance fees and bonuses from performance fees. We also try to exclude unusual items.
4
Includes flows into new products.
Old
$80.3
$10.2
$32.6
30%
$42.7
$0.13
$0.07
$0.07
$450
$7.5
$8.1
2015E
New
$80.3
$10.2
$28.7
26%
$38.8
$0.16
$0.07
$0.06
$450
$7.5
$8.1
Old
$100.7
$24.4
$41.4
33%
$66.2
$0.22
$0.14
$0.10
$600
$8.7
$9.3
New
$100.7
$24.4
$37.0
29%
$61.8
$0.25
$0.14
$0.08
$600
$8.7
$9.3
Source: Company Reports, TD Securities Inc.

Our EPS estimate for Q4/13 increases modestly to reflect the slightly higher than expected
performance fees in 2013. Our base EBITDA and base EBITDA margins have come down given we are
now accounting for a portion of their non-cash stock based compensation related to the firm’s employee
profit sharing plan (EPSP), in line with Sprott’s methodology. Our assumptions otherwise are unchanged.
January 21, 2014
Equity Research
Action Notes
53 of 61
Exhibit 3. Sprott: AUM and Fund Performance Overview
Performance 2013 1
Below High
Water Mark 2,6
Performance
Fee Eligible
(In $mm)
Dec-11
Dec-12
Dec-13
Fund
Hurdle
Public Mutual Funds:
Canadian Equity Fund
Gold and Precious Minerals Fund
Enhanced Balanced Fund
Energy Fund
Small Cap Equity Fund
Sprott Tactical Balanced Fund
Sprott Diversified Yield Fund
Sprott Short-Term Bond Fund
Sprott Enhanced Equity Class
Sprott Resource Class
Sprott Silver Equities Class
$2,497
$1,357
$559
$1,991
$1,010
$429
$121
$33
$158
$27
13.0%
-48.4%
14.3%
13.3%
7.6%
na
4.9%
na
23.2%
-8.6%
-48.1%
no
no
$97
$138
-37.0%
-51.0%
9.9%
10.8%
6.6%
4.9%
2.9%
1.2%
15.2%
-14.4%
-40.2%
yes
yes
$132
$195
$1,598
$432
$164
$68
$67
$94
$21
$150
$19
$407
$17
$23
yes
yes
na
yes
na
yes
yes
yes
no
no
na
no
na
no
no
no
Other
Canadian Hedge Funds:
Hedge Fund L.P.
Hedge Fund L.P. II
Bull / Bear RSP Fund
Enhanced Long Short Equity L.P.
Enhanced Long Short RSP Fund
Small Cap Hedge Fund
Sprott Absolute Return Income Fund
Sprott Private Credit5
Sprott Strategic Fixed Income Fund
Sprott Convertible Strategies Trust
Other5
$47
$1,717
$507
$557
$160
$99
$38
$47
$45
$48
$131
$1,584
$324
$293
$89
$57
$23
$31
$41
$202
na
na
na
na
-55.8%
-57.1%
-59.2%
17.8%
17.4%
1.8%
-6.6%
7.8%
-9.1%
-2.2%
na
10.0%
0.0%
0.0%
0.0%
0.0%
7.6%
4.3%
8.0%
5.1%
na
na
yes
yes
yes
no
yes
yes
yes
na
yes
na
na
no
no
no
yes
no
no
no
na
no
na
na
na
na
na
na
-23.9%
-32.7%
na
na
na
na
na
na
2014 3
$216
$322
$136
$840
$114
$76
$18
$55
$20
$14
$32
$202
$127
$95
$86
Offshore Funds :
$566
$190
$184
Offshore Fund, Ltd.5
$250
$190
$184
$2,971
$4,920
$3,349
Sprott Gold Bullion Fund
Sprott Silver Bullion Fund
$232
$149
$280
$165
$145
$95
Sprott Physical Gold Trust
$1,958
$2,715
$1,895
na
na
na
na
Sprott Physical Silver Trust
$633
$1,500
$968
na
na
na
na
$260
$247
na
na
na
na
$1,386
$1,433
$1,050
na
yes
$9,137
$10,117
$7,020
Bullion Funds
Sprott Physical Platinum & Palladium Trust
Other: Direct Managed Companies + Managed Accounts
4,5
Total AUM / Accrued Performance Fee estimate
1
AUM, fund performance, and performance fee estimates are derived from company reports and Bloomberg data.
2
Applicable to funds with loss carry forwards from previous years. Fund's current NAV relative to its NAV based watermark.
3
Fund is eligible for performance fees if 1) fund is not under water and 2) YTD performance exceeds the fund's hurdle benchmark.
4
Direct Managed Companies include assets managed by Sprott Consulting. Managed Accounts include assets managed by Sprott Consulting and other assets managed by SAM.
5
Returns and AUM as of October 31, 2013 and November 29, 2013 in some cases.
6
As of December 31, 2013
Source: Company Reports, Bloomberg, TD Securities Inc.
January 21, 2014
Equity Research
Action Notes
54 of 61
Valuation
Exhibit 4. Sprott: Comparables Table
Ticker
Price
Market
Cap
($mm)
Enterprise
Value 1
($mm)
AUM ($b)
LTM
2013E
2014E
2015E
LTM
$6.8
16.5x
10.6x
14.3x
13.1x
12.0x
$7.3
nmf
nmf
43.0x
21.5x
14.1x
$559
$21.2
20.4x
19.8x
20.1x
17.7x
19.9x
$755
$926
$67.1
22.1x
20.7x
17.1x
15.4x
19.2x
$113
$142
$7.9
Smaller Cap Asset Mgrs:
Gluskin Sheff + Associates
GS
$28.68
$846
$817
Sprott Inc.
SII
$3.01
$746
$528
GCG.A
$16.15
$526
Fiera Sceptre Inc.
FSZ
$13.27
Aston Hill Financial Inc.
AHF
$1.27
Guardian Capital Group Ltd.
Average
Larger Cap Asset Mgrs:
IGM Financial Inc.
CI Financial Corp.
AGF Management Ltd.
IGM
CIX
AGF.B
$56.56
$35.76
$13.14
$14,256
$10,170
$1,147
Average
Base operating metrics (ex
performance fees)
Gluskin Sheff + Associates
Sprott Inc.
$12,679
$10,235
$1,005
$131.8
$90.9
$35.5
Div
2014E
2015E
EV/
AUM
(%)
7.8x
9.6x
8.8x
12.1%
2.8%
18.9x
13.6x
8.5x
7.2%
4.0%
nmf
nmf
nmf
2.6%
1.4%
17.5x
10.7x
9.1x
1.4%
3.0%
EV / EBITDA 1
P / EPS
2013E
Yield 2
(%)
nmf
nmf
22.3x
25.4x
26.1x
14.1x
9.2x
7.9x
1.8%
4.7%
19.7x
17.0x
23.4x
18.6x
16.3x
14.6x
10.8x
8.6x
5.0%
3.2%
19.1x
34.0x
12.1x
18.6x
23.6x
22.4x
16.1x
19.0x
23.0x
14.5x
16.3x
18.1x
11.1x
14.5x
4.5x
10.9x
13.8x
7.6x
9.7x
11.5x
7.2x
8.9x
10.2x
6.7x
9.6%
11.3%
2.8%
3.8%
3.2%
8.2%
21.7x
21.5x
19.4x
16.3x
10.0x
10.7x
9.5x
8.6x
7.9%
5.1%
LTM
30.3x
71.4x
2013E
29.0x
36.4x
2015E
19.9x
35.5x
LTM
22.4x
13.5x
2013E
21.3x
15.0x
EV / EBITDA
P / EPS
2014E
23.7x
49.8x
1
Our enterprise value (EV) and EBITDA for AGF, CI and IGM excludes non-wealth management businesses (EBITDA also excludes redemption fees).
2
Base dividend only, does not includes special dividends.
2014E
15.8x
18.4x
2015E
13.4x
14.3x
Note: EPS and EBITDA estimates are on a calendar year-end basis.
Source: Company reports and TD Securities Inc. estimates.
We apply a 10.0x multiple to our four quarter forward (ending Q1/15) base EBITDA estimate and use a
discounted cash flow analysis to derive a value for Sprott's performance fees.
(1) Precious metals investment theme remains out of favour; (2) concentration in illiquid investments; (3)
margin pressure due to lower AUM base; (4) performance fee vulnerability; (5) key man risk (Eric Sprott); 6)
material net outflows; and (7) acquisition-related integration risks.
We see the potential for longer-term upside in Sprott’s shares, and there are some encouraging signs around
new product initiatives and a well-capitalized balance sheet. However, we are cautious over the near-term
given Sprott is a turnaround story in our view, and we believe that patience will be required before new
initiatives gain traction and translate into material AUM and earnings growth. The firm also remains highly
leveraged to precious metals, which remain at depressed levels. In the meantime, we believe that margins will
remain under pressure. We are comfortable with a HOLD rating.
Action Notes
Recommendation:
BUY
Unchanged
Risk:
January 21, 2014
Equity Research
55 of 61
Shahin Amini
HIGH
C$12.00
C$13.00
Prior:
12-Month Dividend:
C$0.00
32.0%
Market Data (C$)
Current Price
52-Wk Range
Mkt Cap (f.d.)($mm)
EV ($mm)
Current Dividend
Dividend Yield
$9.09
$5.82-$10.09
$794.5
$672.7
$471.9
--189320
Financial Data (C$)
Fiscal Y-E
Float Shares (mm)
Net Debt ($mm)
Net Debt/Tot Cap
December
87.4
74.0
69.8
($200.5)
nmf
Estimates (US$)
Year
CFPS (f.d.)
CFPS (f.d.)(old)
Oil (b/d)
Gas (MMcf/d)
MBOE/d
2012A
2.05
-17,496
0
17.5
2013E
1.79
1.69
18,304
0
18.3
2014E
1.92
2.05
20,808
0
20.8
2015E
2.49
3.08
25,884
0
25.9
2013E
2.5x
2014E
2.2x
2015E
1.2x
Valuations
Year
EV/DACF
2012A
3.6x
(TGL-T, TGL-N) C$9.09
Re-Visiting Production Forecasts
Event
Ross Clarkson, the Company’s CEO presented at the TD London Energy
Conference last week. In this note we present our main take-aways that
include a revised production forecast, primarily for 2015 and beyond.
Impact: SLIGHTLY NEGATIVE
In our opinion, a slower production ramp-up in Egypt outweighs the positive
updates on the Company’s plans for a possible dividend or share buy-back
and a better than expected EGPC receivables position, which in our view,
were already communicated late last year.
We have adjusted our modelling assumptions to try and account for the
revised production growth road-map in Egypt. Our target price is reduced to
C$12.00 from C$13.00; however, with a 32% upside to our new 12-month
target price, we maintain our BUY rating.
Details
In our opinion, the following are the two main positive take-aways:

Year
Brent -US$/bbl
Base NAVPS
Risked NAVPS
2012A 2013E 2014E 2015E
$112.00 $108.68 $105.00 $100.00
--- C$9.37
---- C$15.18
--

Confirmation that management is assessing the near-term potential of
implementing a dividend or share buy-back; and
Total EGPC receivables collections in 2013 were approximately
US$273 million (2012, US$157 million) and months outstanding
have decreased to about 7 months, which is comparable to the prerevolution period in Egypt.
It is also worth noting that the Company is still considered by some market
participants as one of the most heavily shorted stocks on TSX (about 19% of
outstanding shares). Our understanding is that most of this is not a true short
and in fact, the result of a structured derivative transaction with a neutral net
impact on the Company’s shares. We also understand that should the
Company pay a dividend, it will no longer be a candidate for such a
transaction and the perceived short position could significantly reduce.
Company Profile
TransGlobe Energy is a Calgary-based
International E&P company, with operations
in Egypt and Yemen. The company's shares
trade on the TSX under the ticker TGL and
on the NASDAQ under the ticker TGA.
TGL-T: Price
16
16
14
14
12
12
10
10
8
8
6
6
4
2011
2012
2013
4
2014
Action Notes
January 21, 2014
Equity Research
56 of 61
Exhibit 1 compares the Company’s latest 4-year production growth road-map to that presented in October
2013. One notable change is the delay in South Alamein development with production start-up now not
expected until mid-2015, previously this was expected during 2014. We understand this is due to on-going
delays in securing military’s approval for site access. We highlight that in our opinion, management may be
trying to manage expectations with regards to production growth and that their projections could be
conservative. However, we also note that South Alamein has been delayed much longer than expected and that
it is prudent to assume a more conservative delivery schedule.
Exhibit 2 presents the main changes to our estimates after adjusting our main assumptions to try and account
for a slower production ramp-up and what we consider as higher South Alamein project risks.
Exhibit 1. TransGlobe: Changes to the Company’s Anticipated Production Growth
January 2014
October 2013
Source: Company Presentations
January 21, 2014
Equity Research
Action Notes
57 of 61
Exhibit 2. TransGlobe: Main Changes to Our Estimates
Q3/13A
Q4/13E
New
2013E
Old
% Chg
New
2014E
Old
% Chg
New
2015E
Old
% Chg
Production (Sales, BOE/d)
% Natural Gas
18,197
0%
18,596
0%
18,304
0%
18,255
0%
0%
nmf
20,808
0%
20,527
0%
1%
nmf
25,884
0%
29,457
0%
(12%)
nmf
Financial ($mm)
Cash Flow
Capex
Ending Net Cash / (Debt)
$33
$22
$194
$41
$23
$212
$143
$83
$212
$135
$84
$202
6%
(2%)
5%
$157
$91
$279
$168
$113
$257
(6%)
(20%)
9%
$204
$92
$391
$252
$101
$407
(19%)
(10%)
(4%)
CFPS - f.d.
$0.44
$0.50
$1.79
$1.69
6%
$1.92
$2.05
(6%)
$2.49
$3.08
(19%)
$ 96.65
$ (49.80)
52%
($10.11)
$36.75
$ 96.78
($46.00)
48%
(10.50)
$40.28
$95.82
($47.75)
50%
($10.02)
$38.05
$96.02
($49.10)
51%
($10.02)
$36.89
(0%)
(3%)
(3%)
0%
3%
$ 93.38
($46.90)
50%
($11.00)
$35.48
$94.39
($46.05)
49%
($11.00)
$37.34
(1%)
2%
3%
(5%)
$ 89.69
($44.10)
49%
($11.50)
$34.09
$89.50
($44.73)
50%
($10.00)
$34.77
0%
(1%)
(2%)
15%
(2%)
Base NAVPS
Fully-risked NAVPS
C$9.37
C$15.18
C$9.55
C$16.91
(2%)
(10%)
Base NAVPS
Fully-risked NAVPS
C$756
C$1,272
C$770
C$1,420
(2%)
(10%)
Netbacks ($/BOE)
Revenue
Royalties
% Revenue
Opex
Operating Netback
Source: TD Securities
Outlook
We remain positive on management’s abilities to drive the growth in reserves and production over the next few
years. The four-year plan remains to more than double the production from current 18,000 bopd to about
40,000 bopd. In our opinion, the Company’s current inventory of assets has the potential to achieve this target.
However, Egyptian socio-political risks remain our primary cautionary consideration. Although, we believe
that the Company is in a strong position to benefit from future improvements in Egypt whilst maintaining its
capital expenditure flexibility to maintain a strong balance sheet.
Valuation
As show in Exhibit 3, TransGlobe trades at 0.97x our Base NAVPS, which is below the average for the
producers in our International E&P coverage universe. The company is also trading at a significant discount on
the 2014 EV/DACF metric, which in our view, reflects the near-term Egyptian risk trade-off. We believe that
in the longer term, the company is leveraged to improvements in the Egyptian socio-political environment.
Exhibit 3. TransGlobe: Relative Valuation
Fully-risked NAVPS
Recent
Price
Ticker
Base NAVPS
At Price
Current
Target
2014E EV/DACF*
At Price
At Price
Current
Target
Current
Target
Multiple
Multiple
17-Jan-14
Estimate
Multiple
Multiple
Estimate
Multiple
Multiple
AOI
C$9.51
C$18.06
0.53x
0.75x
C$0.65
nmf
nmf
nmf
nmf
BOE
C$1.70
C$8.19
0.21x
0.49x
C$0.19
nmf
nmf
8.5x
18.2x
BNK
C$4.61
C$8.28
0.56x
0.79x
C$7.13
0.65x
0.91x
3.1x
4.7x
BKX
CNE
C$1.56
C$6.68
C$4.55
C$9.38
0.34x
0.71x
0.60x
0.91x
C$0.28
C$4.56
nmf
1.46x
9.86x
1.86x
9.9x
5.6x
16.8x
5.2x
CKE
C$1.41
C$1.81
0.78x
0.75x
C$0.81
1.74x
1.66x
3.9x
3.7x
GTE
C$7.73
C$9.92
0.78x
0.91x
C$5.22
1.48x
1.72x
4.2x
5.1x
INA
C$0.60
C$1.68
0.36x
0.83x
C$1.41
0.43x
0.99x
1.4x
2.7x
LUP
NKO
C$20.33
C$2.60
C$26.56
C$20.28
0.77x
0.13x
0.94x
0.39x
C$5.02
C$6.47
4.05x
0.40x
4.98x
1.24x
6.6x
4.5x
7.8x
6.5x
PXT
C$7.24
C$11.77
0.61x
0.93x
C$5.91
1.22x
1.86x
2.6x
4.6x
PTA
C$0.33
C$0.50
0.65x
0.99x
C$0.28
1.17x
1.77x
1.5x
2.8x
PDQ
C$0.06
C$0.30
0.19x
0.51x
C$0.02
2.60x
7.08x
nmf
nmf
SLG
C$0.71
C$1.71
0.42x
0.70x
C$1.46
0.49x
0.82x
3.7x
5.2x
TNP
C$0.86
C$2.71
0.32x
0.74x
C$1.59
0.54x
1.26x
3.5x
7.3x
WZR
C$1.07
C$2.26
0.47x
0.77x
C$0.14
nmf
nmf
nmf
nmf
XEL
C$1.89
C$3.45
0.55x
0.72x
C$3.33
0.57x
0.75x
nmf
nmf
0.49x
0.54x
0.75x
0.77x
1.29x
1.34x
2.63x
2.62x
4.5x
4.8x
7.0x
6.7x
0.60x
0.79x
0.97x
1.28x
2.2x
4.0x
Average
Producer Average
TGL
C$9.09
C$15.18
Source: Bloomberg, Company reports, TD Securities
C$9.37
Action Notes
January 21, 2014
Equity Research
58 of 61
Our target price for TransGlobe is based on a combination of 0.75x Base NAVPS and 0.75x Upside to Base
NAVPS. We consider these multiples to be prudent in trying to account for what we consider to be higherthan-average country risk for our International E&P coverage.
Exhibit 4. TransGlobe: Target Price
Base NAVPS
Multiple
Target contribution
$9.37
0.80x
$7.50
Fully-risked NAVPS
Upside to Base NAVPS
Multiple
Target contribution
$15.18
$5.81
0.75x
$4.36
Calculated target price
Actual target price (rounded)
$11.85
$12.00
Source: TD Securities
and environmental and weather concerns.
Key risks specific to TransGlobe are:

Geologic exploration risk is significant.

Political uncertainty is very high in Egypt and Yemen, and any downturn in the security or political
situation could have a negative impact on TransGlobe.

Potential regulatory delays in Egypt are a risk, in our view.

Further delays in collecting revenues from the Egyptian government are a risk.
In our view TransGlobe is a very well-run company with an excellent management team. TransGlobe has an
impressive track-record of growing reserves at very competitive FD&A costs and we see strong potential
across the company’s portfolio for incremental production from lower risk development and appraisal
activities, while recognizing that the fluid Egyptian political situation presents a significant risk.
We have adjusted our production assumptions beyond 2014 and our target price is reduced to C$12.00 from
C$13.00. However, with about 30% upside to our new 12-month target price we retain our BUY
recommendation.
Action Notes
January 21, 2014
Equity Research
59 of 61
Exhibit 5. TransGlobe: Summary Page
TGL
Price
TSX
C$9.09
Basic S/O (mm)
f.d. S/O (mm)
Net debt/(Net cash) (C$mm)
74.0
87.4
C$672.4
(C$200.5)
C$471.9
Post-tax PV
Egypt
Yemen
2P
2P
% Int.
n/a
n/a
COS
100%
100%
Total 2P Reserves
Risked
mmBOE
27.8
2.4
$mm
$386.5
$45.0
C$/
share
$4.79
$0.56
30.2
$431.5
$5.35
30.2
$278.6
$7.9
$37.6
$755.6
$3.46
$0.10
$0.47
$9.37
0.97
42.9
3.8
$455.9
$54.1
$5.44
$0.65
Total Upside Resource
46.7
Discounted G&A
Fully Risked NAV
76.9
$510.0
$68.6
-$62.2
$1,272.0
$6.09
$0.82
-$0.74
$15.18
0.60
Unrisked Upside Resource
Unrisked NAV
P / Unrisked NAVPS
$1,571.7
$37.1
$2,370.8
$18.55
$0.44
$27.98
0.32
Net cash/(debt)
Base NAV
P / Base NAVPS
Egypt
Yemen
Resource
Resource
n/a
n/a
34%
17%
150.5
180.7
AREAS OF OPERATION
Colombia
2012
16,656
840
2013E
17,989
315
2014E
19,309
1,499
2015E
24,017
1,867
Total
17,496
18,304
of which gas (%)
0%
0%
* Includes risked resources and exploration potential
20,808
0%
25,884
0%
FINANCIAL SUMMARY
Cash Flow ($mm)
CFPS - Basic
CFPS - f.d.
Net Income ($mm)
EPS - Basic
EPS - f.d.
Revenue* ($/BOE)
* Net of royalties and hedging
2012
$153.5
$2.10
$2.05
$87.7
$1.20
$1.17
$49.68
$8.18
$41.50
2013E
$143.0
$1.94
$1.79
$77.1
$1.04
$0.97
$48.07
$10.02
$38.05
2014E
$157.0
$2.12
$1.92
$89.6
$1.21
$1.10
$46.48
$11.00
$35.48
2015E
$204.0
$2.76
$2.49
$120.2
$1.62
$1.47
$45.59
$11.50
$34.09
CAPITAL STRUCTURE
Market Cap. ($mm)
Net Debt ($mm)
Capex ($mm)
2012
73.3
75.0
$755
($147)
$609
$79
(1.0)
2013E
73.8
79.8
$584
($212)
$371
$83
(1.5)
2014E
74.0
81.8
$653
($279)
$374
$91
(1.8)
2015E
74.0
81.8
$653
($391)
$262
$92
(1.9)
2012
4.3
7.5
3.6
$26,544.5
2013E
4.9
9.1
2.5
$28,041.5
2014E
4.6
8.1
2.2
$22,348.8
2015E
3.5
6.0
1.2
$13,627.3
Growth
Price
(C$)
*
$15.00
$3.45
Exploration
# of Shares
(mm)
*
5.0
5.8
* 6% unsecured subordinated debentures, convertible at $15.10/sh
Source: Bloomberg, Company Reports and TD Securities
2012
32.8
48.8
$8.29
$13.96
$9.38
* Evaluated by DeGolyer and MacNaughton
ASSUMPTIONS
2012
Brent (US$/bbl)
$112.02
WTI (US$/bbl)
$94.14
Discount rate
Spot FX rate
RECENT FINANCINGS
Date
2/22/12
2/1/11
2/25/09
PRODUCTION (BOEPD)*
Egypt
Yemen
RESERVES
Proved
2P
EV/BOE (Proved)
EV/BOE (2P)
Yemen
BUY
HIGH
C$12.00
0%
32%
31-Dec
Q3/13
VALUATION METRICS
P/CF - f.d.
P/E - f.d.
EV/DACF
EV/BOEPD
Egypt
Mature
Rating
Risk
Target
Current yield
Fiscal Year-end
Proceeds
(C$mm)
$97.75
$75.00
$20.00
INSIDER OWNERSHIP
Management
Proforma
32.8
48.8
$13.96
$9.38
2013
$108.68
$98.00
2014E
$105.00
$92.50
(nominal)
(US$/C$)
2015E
$100.00
$90.00
10.0%
0.9700
BASIC
3%
4%
f.d.
7%
8%
Action Notes
January 21, 2014
Equity Research
60 of 61
TD Securities Equity Research Disclosures
Company
Ticker
Disclosures
Africa Oil Corp.
BNK Petroleum Inc.
Canacol Energy Ltd.
Chinook Energy Inc.
Enerplus Corp.
Iona Energy Inc.
Lundin Petroleum AB
Mullen Group Ltd.
Niko Resources Ltd.
Paladin Energy Ltd.
Petrodorado Energy Ltd.
Potash Corp. of Saskatchewan Inc.
Raging River Exploration Inc.
Sprott Inc.
Xcite Energy Ltd.
AOI-V
BOE-V
BKX-T
BNK-T
CNE-T
CKE-T
CHP.UN-T
ERF-T
GTE-T
INA-V
LUP-T
MTL-T
NKO-T
PRE-T
PDN-T
PAAS-Q
PXT-T
PTA-V
PDQ-V
POT-N
RRX-T
SII-T
SLG-V
TNP-N
TGL-T
WZR-V
XEL-V
n/a
n/a
n/a
9
n/a
2
1, 2, 4
2, 4, 9
9
2, 4
n/a
9
9
9, 10
9
9
n/a
n/a
n/a
9, 10
n/a
n/a
1, 2, 4
n/a
9
n/a
n/a
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
ERF-N
GTE-A
LUPE-STO
PAA-T
POT-T
TNP-T
TGL-N
XEL-LN
TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed or co-managed a public offering of securities within the last 12
months with respect to the subject company.
TD Securities Inc., TD Securities (USA) LLC or an affiliated company has received compensation for investment banking services within the last 12
months with respect to the subject company.
TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to receive compensation for investment banking services within the
next three months with respect to the subject company.
TD Securities Inc. or TD Securities (USA) LLC has provided investment banking services within the last 12 months with respect to the subject
company.
A long position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
A short position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
A long position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s
household, or in an account over which the research analyst has discretion or control.
A short position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s
household, or in an account over which the research analyst has discretion or control.
TD Securities Inc. and/or an affiliated company is a market maker, or is associated with the specialist that makes a market, in the securities of the
subject company.
TD Securities Inc. and/or affiliated companies own 1% or more of the equity securities of the subject company.
A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or a research analyst involved in the preparation of this report has,
during the preceding 12 months, provided services to the subject company for remuneration.
This security has Subordinate voting shares.
This security has Restricted voting shares.
This security has Non-voting shares.
This security has Variable voting shares.
This security has Limited voting shares.
Additional Important Disclosures
TD Securities Inc. acts as an agent on behalf of Sprott Inc. in the execution of securities transactions.
Price Graphs
Full disclosures for all companies covered by TD Securities can be viewed
at
https://www.tdsresearch.com/equities/welcome.important.disclosure.action
by TD Securities' institutional equity clients.
Action Notes
January 21, 2014
Equity Research
61 of 61
Distribution of Research Ratings
Investment Banking Services Provided*
Distribution of Research Ratings^
REDUCE
5%
BUY
53%
80%
70%
60%
50%
63%
40%
30%
35%
20%
HOLD
42%
2%
10%
0%
BUY
HOLD
REDUCE
Current as of January 6, 2014
^ Percentage of subject companies under each rating * Percentage of subject companies within each of the
category—BUY (covering Action List BUY, BUY and three categories (BUY, HOLD and REDUCE) for which
Spec. BUY ratings), HOLD and REDUCE (covering TD Securities Inc. has provided investment banking
TENDER and REDUCE ratings).
services within the last 12 months.
Definition of Research Ratings
ACTION LIST BUY: The stock's total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months and it is a top
pick in the Analyst's sector.
BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months.
SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next 12 months; however, there is material event risk associated with
the investment that could result in significant loss.
HOLD: The stock’s total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12 months.
TENDER: Investors are advised to tender their shares to a specific offer for the company's securities or to support a proposed combination reflecting our
view that a superior offer is not forthcoming.
REDUCE: The stock’s total return is expected to be negative over the next 12 months.
Overall Risk Rating in order of increasing risk: Low (5% of coverage universe), Medium (31%), High (52%), Speculative (12%)
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TD Securities makes its research products available in electronic and/or printed formats and simultaneously distributes them to its institutional clients
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expressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein
that are within the analyst’s coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to
the provision of specific recommendations or views expressed by the research analyst in the research report.
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This report is produced entirely by TD Securities Inc. Although the information contained in this report has been obtained from sources that TD
Securities Inc. believes to be reliable, we do not guarantee its accuracy, and as such, the information may be incomplete or condensed. All opinions,
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by TD Securities' institutional equity clients.

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