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Kelt Exploration beats estimates

The gas-weighted producer and analyst's darling has sold off lately. Is it time to buy back in? Also, Legacy Oil + Gas's results and a few words about that correction we're all waiting for from David Rosenberg

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

Aug 12, 2014

by Max Fawcett

If you’ve been waiting for a better entry point on Kelt Exploration (TSE:KEL)’s shares, well, now’s your chance. The gas producer’s shares are down 20 per cent from their most recent highs in July, and after beating estimates on its second quarter production it might be headed back up to those levels and beyond. AltaCorp noted that Kelt beat estimates on both its cash flow per share (22 cents versus 19 cents) and its production (11,381 boe/d versus 10,630 boe/d). It stuck a $17.50 target on Kelt’s shares – a decent premium to the $12.31 it closed at on Tuesday – and thinks its relatively pristine balance sheet and history of making smart acquisitions makes it a good buy at these levels. “With a positive quarter, the recent downturn in the share price is looking more and more compelling. Add in the recent Capio acquisition at 1.7 times PDP [proved developed reserves] NAV in its core region where some of the top Montney wells have been drilled in Alberta and investors should be becoming quite pleased with Kelt’s operational performance lately.” On Market Call Tonight yesterday, David Rea CEO John O’Connell tapped it as a top pick, noting that “a year from today, they should exit at about 18,500 boe/d – and that’s only assuming 60 per cent success on their drilling program, which is really conservative.”

Legacy Oil + Gas’s results weren’t quite as good, but FirstEnergy’s Cody Kwong liked them enough to stick a $12.50 target on its shares. “Legacy’s 2Q14 results were in line on a production basis…however [they] modestly lagged our estimates as well as consensus forecasts on a CFPS basis as hedging losses and slightly higher cash costs hampered its financial performance,” Kwong wrote in a note. “With that said, current volumes are in excess of 26,000 boe/d (FCC’s 3Q14e – 24,351 boe/d) with significant catalysts such as 15 more Midale wells to be added, 2 extended reach horizontals in the Bakken at Taylorton undergoing completion operations, and a potentially significant Torquay well completion in Flat Lake, all of which will be coming onstream in 3Q14e. Overall we feel the slight cash flow miss in 2Q14e will be overlooked in the market as the company’s operational momentum appears to be the best we have seen it in several quarters and likely to ultimately require positive revisions to 2H14e and 2015e estimates.”

And speaking of hedges, David Rosenberg suggested in a Financial Post piece yesterday that investors might want to put on some of their own in the face of a possibile market correction in the near term. After all, he wrote, all the positive economic indicators in the world aren’t enough to prevent a correction in a relatively old bull market. “In 1998, unemployment had a ’4-handle,’ real GDP growth had a ‘5-handle,’ and nominal growth had a ‘6-handle’ – you could not have drawn up a more bullish economic backdrop – but that did not stop an overvalued market from succumbing to the intensifying financial pressures coming out of the Asian crisis.” What could be the macro event that tips us over into a correction in 2014? Take your pick: from the various wars in the Middle East to the conflict in Russia and its impact on the sputtering European economy and the ever-present risk of the long-rumoured credit crisis in China finally blowing up, there’s plenty to choose from.

Then again, trying to pick an exit point in the midst of a bull market is usually a fool’s errand – just ask anyone who sold last May. And while he notes that investors who pulled out before 2011’s summer correction would have locked in a nine per cent gain for the year (and that those who cashed out before the Black Monday in October of 1987 would have crystallized gains of 36 per cent), that assumes that investors were savvy enough to buy back in after those corrections took place. History suggests that most retail investors do the reverse – sell when things get their ugliest, and buy when they’re too good.

That’s why Rosenberg suggests a more modest strategy for nervous investors. “It may not be that clear that we have entered a true corrective phase of 10 per cent, but there are enough smoking guns around to suggest that such is not a trivial prospect. If it is the case, taking out some insurance without actually having to abandon positions is not altogether a bad idea. In fact, it is probably a very prudent thing to do.”

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