In an Oct. 15 research note, analyst Bill Newman reported that Prairie Provident Resources Inc. (PPR:TSX) is currently "crazy cheap," after raising gross proceeds of CA$5.5 million in a bought-deal financing and agreeing to acquire an oil and gas company.
Newman explained that the financing consisted of 3.8 million flow-through shares and 9.6 million subscription receipts. The receipts will be converted into Prairie Provident units of one share plus half of a warrant when the company's acquisition of Marquee Energy Ltd. closes in November 2018. Also, Prairie Provident will get a credit line increase to US$65 million with about US$21 million undrawn, "providing additional financial flexibility," he noted.
As for the company's acquisition of Marquee, it is a "crazy cheap" deal that "boosts cash flow and opportunity base," Newman pointed out. Prairie Provident will pay about $55 million in stock and assumed debt for Marquee's roughly 2,700 barrels of oil equivalent per day (2,700 boe/d) of low-decline, high-netback production, along with 209,688 acres of land in central Alberta and a development-ready Banff oil play, providing "a large inventory of development locations to fuel lower risk production growth for many years," the analyst added.
The additional production would boost Prairie's total to about 7,700 boe/d, and would increase its Proven reserves an estimated 97% and 2P reserves by about 110%, to 28.3 million barrels of oil equivalent (28.3 MMboe) and 43.2 MMboe, respectively.
Essentially, Newman pointed out, in the transaction Prairie will pay "only" CA$20,500 per flowing barrel. It will pay about CA$3.95/boe for 13.9 MMboe of Proven reserves and pay "only" CA$2.44/boe for 22.6 MMboe of 2P reserves.
Mackie revised its financial projections on Prairie Provident accordingly, increasing 2019 production, cash flow and capital budget estimates. It raised production to an average of 8,000 boe/d from 5,900 boe/d, cash flow to CA$42 million from CA$26.1 million and capital budget to $38 million from $25 million.
"With a larger cash flow and opportunity base, Prairie Provident has more flexibility to allocate capital to projects with the highest potential return," wrote Newman.
The estimated value of the company's pro forma 2P reserves, including those gained from Marquee, is CA$3.25 per share. Yet, the company is "crazy cheap" today, trading at CA$0.35 a share, highlighted Newman. Mackie's target price on it is CA$2 per share, reflecting a 471% projected return. It is a recommended Buy.
This month, the company plans to begin drilling at Evi. In November, the Marquee acquisition should close. In 2019, Newman indicated, it will concentrate primarily on "exploiting its large inventory of lower risk development oil locations and on expanding its proven water flood programs."
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Disclosures from Mackie Research, Prairie Provident Resources Inc., Update, Oct. 15, 2018
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Relevant disclosures required under Rule 3400 applicable to companies under coverage discussed in this research report are available on our web site at www.mackieresearch.com.
ANALYST CERTIFICATION
Each analyst of Mackie Research Capital Corporation whose name appears in this report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the analyst's personal views and (ii) no part of the research analyst's compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research report.
Mackie Research Capital Corporation, its directors, officers and other employees may, from time to time, have positions in the securities mentioned herein.
Bill Newman: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. Within the last two years, Mackie Research Capital has managed or comanaged an offering of securities for, and received compensation for investment banking and related services from Prairie Provident Resources Inc. Bill Newman has research coverage on Prairie Provident Resources Inc.
