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Bring on the re-ratings

Bankers Petroleum has had a heck of a run over the last year. Here's why analysts think it still has plenty of room left in front of it

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 mfawcett@albertaventure.com

Jun 10, 2014

by Max Fawcett

Bankers Petroleum (TSE:BNK) held an investor day yesterday where it updated shareholders and analysts on the progress of its enhanced oil recovery pilot projects (water and polymer flooding), and if the slough of re-ratings is any indication, it’s going pretty well. TD Securities raised its target price by a dollar to $9.50, and stuck Bankers shares on its Action Buy list. Haywood securities tacked on two dollars to its target, and thinks its shares could get to $10 in the near future. And while Dundee Capital added a more modest 65 cents to its existing $8.20 target, it also rates the shares a buy.

According to TD’s report, the optimism is as much a product of the ongoing reductions in well and transportation costs as it is the prospect of added reserves associated with the polymer and water flooding. “Based on the details presented on cost-saving initiatives, our sense that ongoing and planned initiatives have significant potential to continue reducing opex/bbl and improve capital efficiencies is increased,” it said. “We believe that Bankers’ management is doing an excellent job of managing the challenges and opportunities of heavy oil redevelopment in Albania. With over five billion barrels of original oil in place (combined with growing production), the company’s assets offer long-term growth potential that should be attractive to larger companies, in our view. At 0.74-times base NAVPS, Bankers is trading at a significant discount to the average of other international E&Ps under coverage. With production set to grow beyond the current 20,000 barrels per day and large long-term growth potential, we expect Bankers to increasingly attract attention as a potential take-out target.”

And while Sprott’s Eric Nuttall didn’t pick Bankers during his appearance on BNN’s Market Call yesterday, he did leave viewers with a few interesting ideas. First up was Encana (TSE:ECA), which he thinks has considerable upside given the success of its PrairieSky IPO and the ongoing refocusing of its operations. The success of the IPO was “far and above what anybody thought,” he said, noting that they took assets that were trading at five times cash flow and turned them into ones that are trading at 25 times. And Doug Suttles, he says, “has done a great job of selling off non-core assets.” That’s improved the company’s capital efficiency and driven down its debt to cash flow. Indeed, Nuttall said, there’s a rumour that it has a $2.4 billion bid in hand for its Bighorn gas assets, and if it closes on that it would drive that ratio down to just 0.7. “The street’s been slow, I think, to recognize the underlying improvements in the business model.”

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He also tapped Tourmaline Oil (TSE:TOU) as a top pick, noting that the company’s considerable degree of insider ownership – CEO Mike Rose owns 5.5 per cent of the company – is “massively important.” So too is the quality of its assets, and its leverage to rising natural gas prices. “The assets just keep getting better and better. They’re a huge natural gas producer, so they’re going to benefit from the strength that I’m foreseeing in the fall and winter this year, and given that they’re growing so strongly they can grow production per share by roughly 20 to 25 per cent next year.”

Nuttall rounded out his picks with Whitecap Resources (TSE:WCP), a company that he called a “sleep-at-night story, where they’re going to benefit from two years of aggregating assets.” He thinks it’s going to generate $124 million in free cash flow in 2015, and that, if it was applied to the dividend, would increase the company’s payout by 50 per cent. And because putting it to work in the field would only increase the decline rates on its assets – and because its production is already growing without the additional investment – he thinks it’s likely that it gets put back into the pockets of shareholders. “The potential for them to deploy free cash flow towards a dividend increase is very high.”

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