Pembina Pipeline locks down the Duvernay
Plus: bullish calls for Crew Energy and Raging River Exploration
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
Enbridge (TSE:ENB) may be the pipeline company getting all the attention this week with the NEB expected to rule on its Northern Gateway project on Thursday, but Pembina Pipeline (TSE:PPL) stole a bit of the spotlight today with an announcement that it has reached binding agreements with shippers to add $2 billion worth of new pipelines to its existing network in northwest Alberta. It expects to have what it’s calling the “Phase III expansion” up and running somewhere between the end of 2016 and mid-2017.
Investors liked the news, bidding Pembina’s shares up more than four per cent on Tuesday, and they aren’t alone. FirstEnergy’s Steven Paget said that it was “a very significant event for Pembina, as it has won a project that adds 13 per cent to its current EV, defended its pipeline franchise in the northwest corner of the basin and created potential additional demand for its processing, storage and logistics services at Edmonton. Putting it another way, producers handed Pembina near-exclusive control over the liquids pipeline business in the Montney/Northern Duvernay part of the basin when they could have supported another midstream company and created some additional pipeline competition. It shows that producers trust the company to treat them fairly over the long term and it is therefore a reputational win for Pembina.” That reputational win, Paget wrote, could have a spillover effect (probably not the right figure of speech to use when referring to a pipeline …) in terms of additional storage and terminal services business, although FirstEnergy hasn’t included that in its modeling. Still, it likes the agreement, and bumped its price target to $38 per share with an outperform ranking.
Another company that’s been hitting it out of the park of late is Raging River Exploration (TSE:RRX), a track record that’s particularly impressive when compared to those of its fellow junior E&P companies. And if the shape of its 2014 capital budget is any indication, things should continue in that direction in the year ahead. Its $215 million development program is expected to grow production by 38 per cent to 11,000 boe/d, with most of that activity taking place on its Viking properties. FirstEnergy’s Robert Fitzmartyn thinks it bodes well for the company. “Having assembled a sizeable 200 net section position in the Viking play, holding in excess of 1,900 net low risk, high netback drilling opportunities that are set to grow production by 63 per cent (debt-adjusted) in 2014e based on the company’s initial outlook, which we fully expect to move higher throughout the year, we are reaffirming our top pick ranking on an unchanged target price of $9.00 per share.”
And AltaCorp Capital’s Jeremy McCrea issued a note earlier this week highlighting the upside potential of Crew Energy (TSE:CR), noting that its ability to drive down costs on its Montney wells is particularly intriguing. “Today, costs have fallen to $4.7 million with initial production rates increasing to 8.0 million cubic feet per day – all with the shift to open-hole completions and increasing frac intervals. Investors who continue to model production based on prior year capital efficiencies will likely underestimate growth going forward, especially into 2015. In terms of NAV, the current valuation also has investors only paying for approximately 60 Montney-liquids locations (or 10 sections of the 377 total sections), a value that we believe is just too low considering no additional upside value for its other assets.” He has a $10 target on Crew’s shares and an outperform rating.