INVESTMENT RE SEA RCH CHARGER ENERGY CORP. … · 2012. 6. 12. · RE SEA RCH INVESTMENT CHARGER...

Jeffrey J. Fiell, CFA Vice President – Research Analyst [email protected] (403) 536-5457

Please see disclosures on the last page June 12, 2012

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R E S E A R C H I N V E S T M E N T

CHARGER ENERGY CORP. RECOMMENDATION: BUY

CHX-TSXV $0.61 TARGET PRICE: $1.503.50

INITIATING COVERAGE – A NEW JUNIOR E&P WITH MAJOR UPSIDE

Charger Energy Corp. was created on

March 7, 2012 by way of a four-way plan

of arrangement.

Current production is 3,500 boed and we

project a 4,000 boed production rate by

December 31, 2012.

Management has a storied and successful

past record of substantial value creation.

Very well positioned in a technologically

renewed Alberta Viking resource play.

Recent drilling success bolsters

confidence that future development

activity will lead to real value creation.

Currently trading at the absolute low end

of our peer group on many metrics.

In our opinion, Charger is very cheap and

we believe it is a good time to enter the

Viking play via Charger.

We initiate coverage with a BUY rating

and a $1.50 12-month target price as a

result.

FORECAST (2012E) CURRENT PREVIOUS % ∆

Recommendation -- --

Target Price $1.50 -- nmf

Target EV/DACF mulitple 17.6X -- nmf

Production (boed) 2,970 -- nmf

CFPS $0.14 -- nmf

Net Debt $72.2 -- nmf

SHARE STRUCTURE Q1/12A

Shares O/S (basic, mm) 67.32

Dilutiv es O/S (mm) 9.96

Shares O/S (FD, mm) 77.28

Mangmt. & Directors (basic) 13%

52-w eek trading range $1.20 - $2.12

ENTERPRISE VALUE Q1/12A

Market cap. ($mm) $41.1

Working Capital (surplus) $51.7

Long Term Debt --

Net Debt $51.7

Enterprise Value $92.7

FINANCIAL 2011A 2012E 2013E

CFPS (basic) ($0.06) $0.14 $0.72

EV/DACF multiple nmf 9.4X 1.9X

P/CF nmf 4.4X 0.8X

Cash Flow (C$'000s) ($1.8) $8.4 $48.8

CapEx (E&D+net acquis) $31.0 $40.0 $60.0

Net Debt ($15.0) $72.2 $83.4

WTI oil ($US/bbl) $95.14 $88.84 $100.00

AECO-C ($C/mcf) $3.62 $2.13 $2.70

PRODUCTION 2011A 2012E 2013E

Oil (bpd) 34 1,265 2,426

NGLs (bpd) -- -- --

Natural gas (mmcfd) 0.2 10.2 11.9

Equiv alent (6:1 boed) 63 2,970 4,410

Reorganization

& combination

Charger Energy Corp. June 12, 2012

Jeffrey J. Fiell, CFA (403) 536-5457 of 21

TABLE OF CONTENTS

Investment Summary .................................................................................................................................................3

Management Track Record ....................................................................................................................................3

Alberta Viking Formation Exploitation ...................................................................................................................3

Recent Transaction Provides Valuation Transparency ...........................................................................................3

Valuation ................................................................................................................................................................3

Management Track Record ........................................................................................................................................4

Operations Overview ..................................................................................................................................................6

Halkirk - Provost .....................................................................................................................................................7

Ghost Pine ........................................................................................................................................................... 12

Peace River Arch/Wapiti ...................................................................................................................................... 13

Valuation ................................................................................................................................................................. 14

Corporate Guidance and IWSL Forecast .............................................................................................................. 14

Net Asset Value ................................................................................................................................................... 16

Peer Group Comparison ...................................................................................................................................... 17

Target Price Derivation & Recommendation .......................................................................................................... 18

Appendix - Corporate History .................................................................................................................................. 19

The 4-way Plan of Arrangement .......................................................................................................................... 19

Significant Corporate Events ............................................................................................................................... 20



INVESTMENT SUMMARY

We initiate coverage of Charger Energy Corp. (“Charger”, the “Company”

or “CHX”) with a positive BUY rating and a $1.50 per share 12-month

target price based on the following:

MANAGEMENT TRACK RECORD

One of the compelling reasons to own Charger is the past success of

management. Tom Buchanan, Charger’s Chairman & Chief Executive

Officer founded Founders Energy Ltd. (TSX:FDE, delisted) in 1993 from

an initial investment of only $700,000 and ultimately created $3.8 billion in

value by 2012. Founders converted into Provident Energy Trust

(TSX:PVE.UN, delisted) at 5,000 boed in 2001 and Provident then grew

its upstream business to a peak rate of 35,000 boed. The upstream

business was eventually divested and the remaining mid-stream business

was sold to Pembina Pipeline Corp. (TSX:PPL) for $3.8 billion.

ALBERTA VIKING FORMATION EXPLOITATION

The Alberta Viking formation is a play-type that is generating much

industry attention recently. The “resource” play is following the same

pattern of evolution as the Bakken & Viking formations did in

Saskatchewan eight and five years ago respectively; fragmented land

ownership, successful drilling experimentation, development then

corporate consolidation. Charger has an appreciable land position in the

hot technologically renewed Viking formation in Alberta and investors can

therefore enter this play very cheaply, at its formative stages.

RECENT TRANSACTION PROVIDES VALUATION TRANSPARENCY

Cutpick Energy Inc. (private) will be purchased by Crescent Point Energy

Corp. (TSX:CPG) for $425.0 million (not closed yet). The metrics being

paid implies Charger is worth at least double its current trading value.

VALUATION

Charger is trading at $23,942 per producing barrel and $4.59 per reserve

barrel, both metrics being at the absolute low end of our group of 11

junior producers. Reason’s for this are it is a gas-leveraged producer

based on reported results, but will be a liquids levered producer within the

next year. It is also a freshly created producer via a 4-way plan of

arrangement and perhaps the marketplace is waiting for a few quarters of

positive results before it awards Charger a comparable multiple as its

peer group. In any event, we like Charger and initiate with a BUY rating

and a $1.50 12-month target price (146% upside from current trading

levels).



MANAGEMENT TRACK RECORD

The track record of success of Management and Directors is a very

compelling factor in owning Charger. Many members of current

Management and Directors were together at Founders Energy Ltd.

including Tom Buchanan, Kelly Cowan and Mark Walker (current Charger

Management) and current Director, Mike Shaikh. Other very notable

directors of Founders were Grant Billing, Byron Seaman and John

Zaozirny.

Founders was founded by Tom Buchanan and Kelly Cowan (see

management below) in 1993 and subsequently converted Founders into

Provident Energy Trust in 2001 – the first junior oil and gas E&P to do so.

Production at the time of conversion was ~5,000 boed.

With Tom Buchanan as President & CEO, Provident grew upstream

production from 5,000 boed in 2001 to a peak of ~35,000 boed via both

the drill bit and accretive acquisitions. Over $7.0 billion in acquisitions

were effected (including midstream acquisitions) with notable upstream

acquisitions of Maxx Petroleum (+7,700 boed), Richland Petroleum

(+4,500 boed), southeast Alberta properties (+3,600 boed), Meota

Resources (+11,400 boed), Olympia Energy (+4,900 boed), Viracocha

Energy (+5,400 boed), Rainbow assets (+5,500 boed), Capitol Energy

(+4,400 boed) and Triwest Energy (+1,300 boed).

In 2009, Provident made the strategic decision to segregate the upstream

business from the significant mid-stream business by divesting its oil and

gas properties, most notably divesting to Crescent Point (-3,646 boed),

Emerge Oil & Gas (-2,200 boed) and Storm Ventures International (-

5,000 boed). The remaining Canadian upstream assets were sold via an

arrangement with Midnight Oil Exploration (-13,130 boed) in June 2010

which together created Pace Oil & Gas (TSX:PCE).

Tom Buchanan architected Provident Energy Trust: its upstream growth,

its midstream business development, its conversion to a dividend paying

corporation and the ultimate divestiture of the upstream business. At the

time of the wind-up of the upstream business, Mr. Buchanan decided to

leave Provident to start another junior oil and gas E&P – Charger Energy

Corp. in October 2010.

The remainder of Provident Energy Ltd. (i.e. the midstream business) was

ultimately sold to Pembina Pipeline for $3.8 billion in April 2012. Tom

Buchanan has been a director of Pembina since August 2010.

In our opinion, this kind of successful history lends confidence in us that

owning Charger will ultimately be very rewarding for shareholders.



Name Charger Position Previous Position Years in

O&G

Tom Buchanan Chairman & CEO President & CEO & Director, Provident Energy Trust

28

Dan O’Byrne President & COO Executive VP & COO, Provident Energy Trust

29

Mark Walker VP Finance & CFO Senior VP Finance & CFO, Provident Energy Trust

22

Kelly Cowan VP Corporate Development & Land CEO, Churchill Energy Inc. 28

John Milford VP Exploration & Development Independent Consultant 29

Dan Fournier Legal Counsel & Corporate Secretary Current Partner, Blake Cassels & Graydon LLP

28

Name Current Occupation Other Directorships Director

Since

Tom Buchanan Chairman & CEO, Charger Energy Emera, Pembina Pipeline, Athabasca Oil Sands, Pace Oil and Gas, Hawk Exploration

Mar/6/12

Dan O’Byrne President & COO, Charger Energy Mar/6/12

John Wright Outside Director CHX (1)(2)(3), President & CEO, Petrobank Energy and Resources, President & CEO PetroBakken Energy

Petrominerales (Chairman), Petrobank Energy and Resources

Mar/6/12

Mike Shaikh Outside Director CHX (1)(3) Provident Energy Ltd., Pace Oil and Gas, Hawk Exploration

Mar/6/12

Randall Findlay Outside Director CHX (2)(3), Canadian Helicopters Group, Compton Petroleum, Pembina Pipeline, Superior Plus, Whitemud Resources

Mar/6/12

Daryl Gilbert Outside Director CHX (1)(2), Managing Director, JOG Capital

Jun/15/07

(1) Member, Audit Committee (2) Member, Reserves, Environment, Haelth & Safety Committee (3) Member, Nominating, Governance & Compensation Committee

Source: Company Reports

Exhibit 1 – Charger Senior Management

Exhibit 2 – Charger Board of Directors

Source: Company Reports



OPERATIONS OVERVIEW

The combined entity is a very attractive junior E&P with a good

distribution of asset types that should allow Charger to capitalize on any

relative swing in oil versus gas prices.

As it is today, Charger is gas-weighted in terms of both production (63%

gas Q2/12E) and reserves (59% gas pro forma). However virtually all of

Charger’s activities this year are light oil-directed at Halkirk – Provost and

we expect its’ production weighting to gas to decrease to 52% by Q4/12E

and to 45% in 2013E.

Opportunity via undeveloped prospective land is the key to success for

any junior E&P and Charger is well positioned with high working interests

in a total 297,920 net acres (average 73% working interest) plus it has

three separate farm-in deals providing access to a further 231,680 acres

at Charger’s option.

As shown above, a large portion of the total land position came from

Silverback at Halkirk – Provost which complemented Charger (private)

land. Of the four combined companies, Silverback also had the highest

leverage to light oil-prone land, production and reserves.

Exhibit 3 – Charger Areas of Operation

Source: Company Presentation



HALKIRK - PROVOST

Halkirk – Provost is Charger’s primary area of focus this year with $58.0

million of its $60.0 million guided capital program allocated to it. The

Viking light oil fairway is shown above in green and covers about 100

sections of Charger’s total 252 section land base.

Farm-in Agreements

In addition to its 110 sections of Crown land and 142 sections of Freehold

land, Charger has two farm-in agreements providing options on an

additional 313 sections as follows:

Halkirk – acquired via Silverback, covers 282 sections, in the

second rolling extension year to March 2014, 10 horizontal Viking

oil wells drilled fulfilled the initial commitment, earns 4 sections per

horizontal well drilled, royalties of 80% of 2009 Crown Royalty

Framework paid to fee simple owner (farmor, EnCana)

Provost – acquired via Charger (private), covers 41 sections, in

first year of a rolling extension to March 2013, 8 earning wells

drilled fulfilled the first year commitment of 6 wells & drilled 2

earning wells in the second option year, earns 2 sections per

horizontal well drilled, royalties of 80% of 2009 Crown Royalty

Framework paid to fee simple land owner (farmor, EnCana)

Exhibit 4 – Halkirk Operating Area

Source: Integral Wealth Securities, Company Presentation

HALKIRK

KILLAM FORSTBURG

BULWARK

BROWNSTONE

CONSORT

NEUTRAL HILLS

SOUTH PROVOST

DENOTES HIGH

PRIORITY VIKING POD



Recent Transaction Provides Valuation Transparency

Cutpick Energy Inc. is the most active Viking oil player operating in

Halkirk with 94 horizontal wells drilled to April 2012 and a further 52

locations licensed. Crescent Point announced May 3, 2012 it had entered

into an arrangement agreement to acquire all of the issued and

outstanding shares of Cutpick for $425.0 million (expected closing is June

19, 2012).

Cutpick has current production of 5,600 boed (65% light oil), 300+ net

sections of land in Halkirk (83 net sections prospective for Viking light oil),

300 net identified Viking drilling locations, $260 million in tax pools, 20.5

mmboe 2P reserves. The acquisition metrics are:

Production acquisition value of $73,036/boed

Reserves acquisition value of $19.95/boe ($33.52/boe proved)

Cash flow multiple of 5.1X ($100/bbl WTI, C$2.75/mcf AECO)

Implied Charger Value Using the Cutpick Metrics

There are many parameters to consider in valuing an acquisition, such as

asset concentration, reservoir quality of properties, well performance,

balance sheet etc.

Using the Cutpick metrics however, Charger’s theoretical stock price

would be:

$3.15 on a production basis

$4.60 on a reserves basis

$3.40 on a 2013 cash flow basis

In Charger’s case, its total asset base is not nearly as concentrated as

Cutpick’s, however a large portion of Charger’s land in Halkirk is directly

offsetting Cutpick’s land via Silverback. We also note Cutpick’s horizontal

Viking wells outperformed all other drillers in the Halkirk area by a

significant margin (see exhibit 5 below). Cutpick is also 65% oil weighted

versus Charger being 37% in Q2/12E, so it is unlikely Charger would, at

the end of the day, garner Cutpick’s metrics. But in our view it is clear,

Charger is currently heavily discounted given its exposure to the Viking at

Halkirk.

Halkirk Viking Well Performance To Date

We analyzed a 210 horizontal well-set of Viking producers at Halkirk to

the end of February based on publicly available data. The average IP30

of all wells was about 100 boed with gas-to-oil ratios of about 1,000 cf/bbl.



As shown above, the average well produces an IP30 of 100 boed while

Cutpick wells produced an average of 160 boed, making those wells

economically superior to all else.

Viking Economics

There are varied drilling and completion methods by operators in the area

and, to a large extent, involve the length of the horizontal lateral:

Short laterals – drilled and completed monobore (i.e. continuous

production tubing from wellhead to toe), 600 – 800m horizontal

leg, 14 stage frac

o IP30 expected to be 55 bpd (66 boed)

o EUR expected to be 74.4 mbbls (89.3 mboe)

o Total capital cost (assuming no Pad) $1.425 million

Long laterals – 1,000 – 1,400m horizontal leg (0.9 miles), 16-18

stage frac

o IP30 expected to be 85 bpd (102 boed)

o EUR expected to be 109.2 mbbls (131.0 mboe)

o Total capital cost (assuming no Pad) $1.98 million

Pad drilling, where four (or more) legs are drilled from the same location,

economizes capital via shared tankage etc and tie-in costs. The savings

are $150,000 - $300,000 per well. In the interest of conservatism

however, we ran all of our economics without pad drilling savings.

0

25

50

75

100

125

150

175

0 2 4 6 8 10 12 14 16 18 20 22 24

Pro

duct

ion

Rat

e (B

OE

D)

Production Months

All Producer Hz Viking WellsGreater Halkirk, AB Region

Cutpick Halkirk East (58)

Cutpick Provost (33)

Penn West (17)

Equal (18)

Charger (7)

Silverback (13)

All Other Producers (51)

Westfire (13)

Average (200 of 210)

Avg. regression (200 of 210)

y = -30.01ln(x) + 101.26

0

25

50

75

100

125

150

175

0 2 4 6 8 10 12 14 16 18 20 22 24

Pro

duct

ion

Rat

e (B

OE

D)

Production Months

All Producing Hz Viking WellsHalkirk (200 of 210-well set)

Best well - IP 994 boedCutpick - Halkirk East

Exhibit 5 – Halkirk Hz Viking Well Performance and Average Curves by Producer

Source: GeoScout, Integral Wealth Securities



In addition to horizontal leg length, there is also an economic difference

between crown land drilling and freehold/farm-in drilling in terms of

royalties. The Alberta Provincial Government materially increased Crown

royalties effective January 2009 but then reduced royalties effective

January 2011. Freehold & farm-in drilling are subject to royalties of 80%

(negotiated) of the 2009 Royalty Framework, which do not qualify for the

new well royalty cap on horizontal wells. This program, pursuant to the

2011 Royalty Framework, limits royalties payable on new horizontal wells

to 5% for the first 50,000 bbls of production or the first 18 months,

whichever comes first (better incentives for deeper, longer reach

horizontal wells). The result being crown land drilling is marginally more

economic than drilling on freehold or farm-in land as follows:

Short-reach wells drilled on Crown land offer the best economic return,

followed by long-reach wells drilled on Crown land. It should be noted

though, the ideal drilling candidate is governed more so by reservoir

quality and deliverability than on marginal economic differences, such as

at Neutral Hills discussed below.

Exhibit 6 – Halkirk Hz Viking Economic Metrics (Sproule April 1, 2012 Price Forecast)

Source: Integral Wealth Securities

Short Short Long Long

Metric Crown Freehold/Farm Crown Freehold/Farm

IRR 42.8% 35.0% 49.5% 37.0%

ROR (@ 10% disc.) 133.3% 121.1% 138.3% 121.9%

NPV (10%, p.t., $000s) $1,884.5 $1,710.7 $2,715.2 $2,393.4

NPV/boe $21.10 $19.15 $20.73 $18.27

Onstream cost ($/boed) $36,387 $36,387 $31,887 $31,887

F&D cost ($/boe) $15.95 $15.95 $15.12 $15.12

Cash netback/boed $59.55 $43.97 $60.64 $40.95

Recy cle ratio 3.7X 2.8X 4.0X 2.7X

Pay back (months) 23 30 18 28

Exhibit 7 – Halkirk Viking Short Reach Hz (left) & Long Reach Hz (right) Type Curves


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

0

10

20

30

40

50

60

70

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Production & Reserves Type Curve

Avg. Annual Production (boed) Cumulative Production (mboe)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

0

5

10

15

20

25

30

35

40

45

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Production & Reserves Type Curve

Avg. Annual Production (boed) Cumulative Production (mboe)



In addition to the 11 wells drilled into the Viking so far, Charger is ready to

put a 4-well pad on production at Neutral Hills within the greater Halkirk

area (shown below).

Black wells are on production, the red wells make up the 4-well pad, the

blue wells are future development locations and the grey wells are future

infill locations.

In its first quarter results press release, Charger stated it is very

encouraged by the test rates of the pad wells and expects these wells to

deliver IP30’s similar to other wells drilled at Neutral Hills, such as 16-35-

36-8W4 and 102/16-35-36-8W4 (two black wells which both IP’d over 100

boed).

As we will discuss under the section entitled “Valuation”, we are only

considering future development at Halkirk, Neutral Hills and Consort in

setting our target price for Charger.

Exhibit 8 – Neutral Hills Development Plan




GHOST PINE

The legacy Twining Comingled

pool (primarily Pekisko) has

generated some new-found

interest given horizontal, multi-

frac drilling technology.

Connacher Oil & Gas (TSX-

CLL) is the most active player

in the Pekisko at Twining with 7 Horizontal wells drilled to date, however

Connacher currently has this property (amongst others) up for sale.

Based on recent discussions with Connacher, our model assumes well

costs of $4.0 - $4.5 million, assumed IP30’s of 160 boed (75% oil) and

EUR’s of 162 mbbls of 30o API oil. Our model returned a 20% IRR,

$18.47/boe F&D cost and a 47-month payback – not stellar metrics in our

view. Our experience suggests the horizontal Pekisko play is risky given it

is just emerging – technologically - with less than robust economic

metrics.

Charger has 50 crown sections, one freehold section and a 49-section

farm-in option. A 43-section farm-in expires on July 31, 2012 and commits

Charger to drill seven wells by that time, including a Viking horizontal, a

Mannville horizontal and a Pekisko horizontal. It is unclear whether or not

the 7 wells will be drilled over the next six weeks and as such, we assume

Charger is trying to negotiate an extension to the expiry date.

CLL wells

Exhibit 9 – Ghost Pine Operating Area




PEACE RIVER ARCH/WAPITI

The Peace River Arch and Wapiti properties came via Seaview and

represents low cost gas production (PRA) and significant oil and liquids

rich gas resource potential in the Cardium formation (Wapiti) across

72,320 net acres (46% average interest).

There has been some industry activity in the Cardium at Wapiti since

2010, but with mixed results as to liquids content and productivity due to

under-pressurization. Wells in this area are expensive at $3.8 - $4.2

million with initial productivities not that much better than a typical Bakken

well (i.e. 125 – 140 boed). With that, Charger does not plan to drill this

area in 2012 and we have not included any NPV estimates as a result.

Once gas prices recover however, the PRA and Wapiti represent

excellent properties to quickly drill and bring-on gas production.

Exhibit 10 – Peace River Arch/Wapiti Operating Area


Oil prone in north

Liquids rich gas

prone in south



VALUATION

CORPORATE GUIDANCE AND IWSL FORECAST

The strategic business combination and reorganization transaction was

announced on November 21, 2011 and was expected to close in late

January/early February. With the closing announcement actually taking

place on March 7, 2012, the assets were not worked according to original

schedule. As a result of the closing delay, 2012 corporate average

production guidance of 4,600 – 5,100 boed, based on a $75 million

capital program, was pared back to 3,500 boed (45% liquids) and a 2012

exit rate of 4,400 boed, based on a $60 million capital program.

Our 2012 outlook is lower than current corporate guidance given a lower

commodity price outlook. In our view, lower capital spending due to debt

limit constraints is required and thus a lower average production rate is

expected to result.

We are forecasting capital spending of $40 million in 2012 which results

in our forecast of 25 new wells versus the corporate forecast of 35 wells.

Based on our capital spending assumption, we forecast average

production of 2,970 boed in 2012 which would generate $8.4 million in

cash flow on the year based on our commodity price forecast above.

Because the transaction closing was not announced until March 7, 2012,

results are not indicative of full year effect of the combined entity. We are

therefore valuing Charger based on the full-year 2013, which in our model

assumes capital spending of $60.0 million, generating average production

of 4,410 boed and cash flow of $48.8 million ($0.72 per share). Although

we are showing an aggressive 2013/2012 average production growth rate

of 48%, we have comfort given:

2012 average production does not reflect the full year effect of the

combination

Exhibit 11 – IWSL Commodity Price Outlook


Q1/12A Q2/12E Q3/12E Q4/12E 2011A 2012E 2013E

West Tex as Interm. US$/bbl $102.88 $92.65 $80.00 $80.00 $95.14 $88.84 $100.00

Edmonton Par C$/bbl $91.44 $78.73 $65.00 $65.00 $95.18 $74.98 $97.00

Hardisty 12o Heav y C$/bbl $85.29 $69.77 $56.50 $56.50 $83.40 $66.95 $72.75

------------ Quarterly Price Assumptions ------------ ----- Annual Price Assumptions -----

Ny mex Henry Hub US$/mcf $2.52 $2.35 $2.70 $2.97 $4.03 $2.63 $3.30

AECO spot $C/mcf $2.18 $1.89 $2.10 $2.37 $3.62 $2.13 $2.70



Our base case exit 2012 production is 4,000 boed versus 4,400

boed guided by Charger

After 25 Viking wells are drilled at Halkirk by the end of 2012,

drilling and completion methods will be optimized for maximum

well performance

Exhibit 12 – Forecast Model


C$000s CURRENT PREVIOUS % r CURRENT PREVIOUS % r

Recommendation

Target price $1.50 -- nmf $1.50 --

MULTIPLES

Target EV/DACF multiple 17.6X -- nmf 3.7X -- nmf

Current EV/DACF multiple 9.4X -- nmf 1.9X -- nmf

Current P/CFPS multiple 4.4X -- nmf 0.8X -- nmf

PRODUCTION

Oil (bblsd) 1,265 -- nmf 2,426 -- nmf

NGLs (bblsd) -- -- nmf -- -- nmf

Gas (mmcfd) 10.2 -- nmf 11.9 -- nmf

Equiv alent (6:1) 2,970 -- nmf 4,410 -- nmf

COMMODITY PRICES

WTI oil price (US$) $88.84 -- nmf $100.00 -- nmf

Edmonton light oil price (C$) $74.98 -- nmf $97.00 -- nmf

Henry Hub gas price (US$) $2.63 -- nmf $3.30 -- nmf

AECO spot gas price (C$) $2.13 -- nmf $2.70 -- nmf

Corp. oil price realization $67.50 -- nmf $94.00 -- nmf

Corp. NGL price realization $63.74 -- nmf $82.45 -- nmf

Corp. gas price realization $2.11 -- nmf $2.76 -- nmf

Corp. equiv . price (C$, 6:1) $35.54 -- nmf $59.14 -- nmf

Netback (cash flow /boed) $7.69 -- nmf $10.14 -- nmf

FINANCIAL

Rev enue 38,638 -- nmf 95,199 -- nmf

Cash flow from operations 8,360 -- nmf 48,789 -- nmf

CFPS (basic) $0.14 -- nmf $0.72 -- nmf

Net Income (18,954) -- nmf 5,273 -- nmf

EPS (basic) ($0.30) -- nmf $0.08 -- nmf

CapEx (E&D + net acquis/div est) 40,000 -- nmf 60,000 -- nmf

Net debt (end of period) 72,236 -- nmf 83,447 -- nmf

Av erage shares O/S (basic) 60,118 -- nmf 67,321 -- nmf

----------------- 2012E ------------------ ----------------- 2013E -----------------



NET ASSET VALUE

Combined reserves have not yet been evaluated by a single engineering

evaluator, however we believe it is likely a “unified” report will be

completed by the end of Q3/12E.

For year-end 2011 reserves, the original reserve evaluators for the four

companies were used but a unified price forecast was applied - the

December 31, 2011 Sproule & Associates price forecast.

The independent reports were:

Charger Sproule effective December 31, 2011

Seaview Sproule effective December 31, 2011

Silverback Insite effective December 31, 2011

Sirius GLJ effective December 31, 2011

Our calculated NPV10% using the Sproule December 31, 2011 price

forecast was very close to the $176.9 million shown in Charger’s annual

information form. Our NAV calculated above uses the March 31, 2012

Sproule price forecast and reported Q1/12 balance sheet items.

As shown, Charger, trading at $0.61, is trading well below its computed

NAV of $2.28/share ($2.15/FD share) as at March 31, 2012 and

represents a Price to NAVPS of 0.3X.

Exhibit 13 – Estimated Net Asset Value as at March 31, 2012


($000) 0% 10% 15% 20%

Prov ed

Producing 82,175 46,647 37,409 30,870

Non-producing 18,170 11,924 10,138 8,805

Undev eloped 119,284 63,187 48,504 38,144

Total Prov ed 219,629 121,758 96,051 77,819

Total Probable 137,091 63,636 45,504 33,119

Total Prov ed + Probable 356,719 185,394 141,555 110,938

Net undev eloped land 19,776

Long term debt --

Current assets 12,634

Current liabilities (64,302)

Other assets/liablilities --

Total balance sheet items (31,892) (31,892) (31,892) (31,892)

Net asset v alue - basic 324,827 153,502 109,663 79,046

Options ex ercise proceeds 12,893

Net asset v alue - fully diluted 337,720 166,395 122,556 91,939

Net asset v alue per basic share $4.83 $2.28 $1.63 $1.17

Net asset v alue per fully diluted share $4.37 $2.15 $1.59 $1.17



PEER GROUP COMPARISON

In our group of 11 junior producers, it is interesting to note that the pattern

of increasing EV/BOED and EV/BOE is directly proportional to increasing

leverage to liquids. At the low end, Open Range and Charger are only 9%

and 39% respectively leveraged to liquids production (Q1/12A) while at

the other end of the spectrum, Whitecap and Second Wave are 68% and

77% liquids leveraged. (note: Vero appears to trade to a low EV/BOED

due to Q1/12A results only partially reflecting its gas disposition in the

average).

Exhibit 14 – Comparative Enterprise Values per Producing & Reserve Barrel Equivalent

$0

$20,000

$40,000

$60,000

$80,000

$100,000

ONR CHX VRO MEI AXL HYX TBE NVS DTX WCP SCS AVG.

Enterprise Value/BOED

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

CHX ONR MEI AXL HYX NVS WCP TBE VRO SCS DTX AVG.

Enterprise Value/BOE




TARGET PRICE DERIVATION & RECOMMENDATION

In setting our target prices, we prefer to use a hybrid approach that

incorporates a “normalized” cash flow multiple component, plus a risked

development upside component based on our NPV analysis.

In our view, the marketplace is not rewarding producers that are in the

process of de-leveraging to natural gas right now. We believe the market

wants to see the actual de-leveraging to natural gas transition being

executed in reported results and, until that time, or until natural gas prices

start normalizing relative to crude oil prices, gas-leveraged producers will

continue to trade to lower multiples than liquids leveraged producers.

In terms of setting target prices for junior producers then, we would tend

to use a 3.5X EV/DACF multiple (2013) for our cash flow component

assuming a 60% liquids leverage. For Charger, despite its huge liquids

growth opportunity at Halkirk, we are using a 3.0X target EV/DACF

multiple due to its reported gas leverage. We therefore start with a

resulting $0.90 per share cash flow component in setting our target price.

For the future growth component of our target price, we are only

considering the three high priority pods at Halkirk - Provost, namely

Halkirk, Neutral Hills and Consort which collectively represent

approximately 31 gross sections. We assume an average 91% working

interest and 80 acre spacing (8 wells per section) and therefore compute

228 un-risked locations. We further assume 75% of the locations are

prospective, then risk drilling with a 75% chance of success, all leading to

our calculated 128 hard drilling locations across the three high priority

pods.

For simplicity, we take the risked 128 locations, assume the locations are

drilled evenly between short-reach on Crown land, short-reach on

freehold/farm-in land, long-reach on Crown land and long reach on

freehold/farm-in land and apply the computed NPV’s shown in exhibit 6.

We assume all 128 locations are drilled evenly across five years such that

the resulting $278.4 million sum of annual NPV upside is present valued

back to today (5 years, 10% discount rate) to equal a $208.7 million NPV

upside, or $3.10 per share. Lastly, we credit our target price with only

20% of that, or $0.62 per share, representing just one year of future

drilling.

So, our $1.50 target price is based on $0.90 per share (3.0X EV/DACF)

and $0.62 per share (20% of risked development at 3 of 5 Viking pods at

Halkirk). With that, our target price is conservative in our view and

represents more than a double from current trading levels. Accordingly,

we rate Charger a BUY.



APPENDIX - CORPORATE HISTORY

THE 4-WAY PLAN OF ARRANGEMENT

On November 21, 2011, Seaview Energy Inc. (TSXV:CVU.A) announced

it entered an arrangement agreement, dated November 11, 2011, to

effect a strategic business combination with Charger Energy Corp.

(private), Silverback Energy Ltd. (private) and Sirius Energy Inc. (private)

to form a public, light oil focused, growth oriented junior exploration and

production company (or “E&P”).

The transaction closing was announced on March 7, 2012 and had the

following characteristics:

Each Charger share was exchanged for 3.6364 Seaview shares for

$72.5 million in value (based on the November 11, 2011 CVU.A

closing price of $0.53)

Each Silverback share was exchanged for 5.8181 Seaview shares for

$54.4 million in value

Each Sirius share was exchanged for 0.80 Seaview shares for $11.1

million in value

Each class B Seaview share was exchanged for 10.0 Seaview class A

shares

Seaview class A shares were consolidated 1 for 5 resulting in

“Amalco” shares outstanding of 67.3 million and fully diluted shares

outstanding of 77.3 million (8.0 warrants, 2.0 million options)

Seaview changed its name to Charger Energy Corp. and began

trading on the TSXV under the changed symbol of CHX from CVU.A

(March 8, 2012). Note: the stock chart on the cover reflects CVU.A to

March 8, 2012, thereafter the combined CHX

Management of the former Charger (private) replaced Seaview

management

The arrangement constituted a reverse takeover transaction (TSX

Venture exchange Policy 5.2) resulting from Charger management

replacing Seaview management.

The characteristics of the combined company at the time of closing were:

Production of 3,500 boed (30% liquids) and proved and probable

reserves as at September 30, 2011 of 19.3 mmboe (59% proved, 39%

liquids)

Undeveloped land of 120,000 net acres plus 230,000 net acres of

farm-in option land



Enterprise value of $214 assuming Seaview’s price at transaction

closing ($0.53), exchange ratios and estimated net debt

Estimated pro forma net debt of $36 million at the time of

announcement with a $65 million revolving operating line

Tax pools of $150 million

Enterprise valuation metrics of $55,370/boed and $18.29/boe

SIGNIFICANT CORPORATE EVENTS

Seaview Energy Inc. (formed in 2006, public in October 2007):

Completed a large asset acquisition in the Peace River Arch area for

$26.5 million (June 2009)

Issued 15.4 million shares for gross proceeds of $15.7 million (June

2009)

Disposed of assets in southeast Saskatchewan for $33.0 million

(August 2011)

Charger Energy Corp. (private, formed in October 2010 and public,

formed in March 2012):

Founding and incorporation (September 2010)

Issued 20.0 million shares for gross proceeds of $20.0 million

(December 2010)

~60 boed acquisition for $2.4 million (April 2011)

Farmed-in on 41 sections over a 32 township block at Halkirk -

Provost, AB prospective for light Viking oil (December 2010)

Issued 17.1 million shares for gross proceeds of $30.0 million (June

2011)

Farmed-in on 43 sections at Ghost Pine, AB prospective for Viking,

Mannville and Pekisko light oil (July 2011)

Acquired a further 29 sections at Crown land sales in both Halkirk and

Ghost Pine (2011)

Drilled 8 successful farm-in earning wells for Viking light oil at Halkirk

(2011)

Drilled a further two Viking oil wells at Halkirk (2012)

Engineered the four-way arrangement (November 2011) and closed

(March 2012)

Drilled its first 4-well pad at Halkirk (Neutral Hills “pod”) and expected

to be on production this week.

TORONTO

900-56 Temperance St. Toronto, ON M5H 3V5 T 416 203 2000 F 416 860 9669

CALGARY

Suite 1510, 555 – 4th Avenue SW

Calgary, AB T2P 3E7 T 403 444 1392 F 403 444 1397

DISCLOSURE:

1) Jeffrey Fiell is an employee of Integral Wealth Securities and certifies that the recommendations and opinions expressed in this research report/sales literature accurately reflect his views on the issue discussed herein.

2) The particulars contained herein were obtained from sources that we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the security mentioned herein.

3) Integral endeavors to make reasonable efforts to disseminate research to all eligible clients in a timely manner, through either physical or electronic distribution, such as e-mail, or by posting to Integral’s proprietary website.

4) The compensation of research analysts is intended to reflect the value of the services they provide to the clients of Integral. As with most other employees, the compensation of research analysts is impacted by overall profitability of the firm, which may include revenues from investment banking activities of the firm’s Corporate Finance department. Research analysts’ compensation is not, directly related to any specific corporate finance transaction. Issuers are not permitted to pay any expenses associated with a visit to its material operations by the research analyst.

5) Currently Integral does not own, control or beneficially direct more than 1% of the equity issue of this security.

6) The analyst that prepared this research report, does not hold any of the issuers security directly or indirectly (such as, through derivatives).

7) Integral has provided advisory and corporate finance arrangements with the Company and has received commissions within the last 12 months.

8) Integral serves in an advisory capacity to the Company on an on-going basis.

9) Integral has and may continue to maintain a position in the Company from time to time.

10) Integral hereby states that, there has been no involvement or influence directed in any shape or form for the approval of this research report by the investment banking department.

11) Valuation “re. Target Price” see applicable section.

12) Integral has not participated in any buy-back or repurchase agreement in the issuers equity within the last 12 months.

13) No employee, Director or Officer of Integral receives any form of remuneration from the Company directly or indirectly.

14) No employee, Director or Officer of Integral is currently or has previously served on the Company Board of Directors.

Jeffrey J. Fiell, CFA Vice President – Research Analyst (403) 536-5457 [email protected]

Dan Martin, CFA Oil & Gas Investment Banking (403) 444-1395 [email protected]

Paul Klemke Oil & Gas Investment Banking (403) 444-1393 [email protected]

Stephen Hughes Oil & Gas Institutional Sales (403) 444-1394 [email protected]

Adrian Turchet Mining Investment Banking (416) 583-5219 [email protected]

Jeff Brandes Trading (416) 640-5171 [email protected]

John Gibson CEO/Investment Banking (416) 203-5864 [email protected]

INVESTMENT RE SEA RCH CHARGER ENERGY CORP. … · 2012. 6. 12. · RE SEA RCH INVESTMENT CHARGER...

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Transcript of INVESTMENT RE SEA RCH CHARGER ENERGY CORP. … · 2012. 6. 12. · RE SEA RCH INVESTMENT CHARGER...