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Prairie Provident undervalued and set to grow production and reserves

The oiler posted its 2017 year-end reserves evaluation and guidance for this year's capital budget and guidance
rig
The oiler said proven plus probable (2P) reserves increased by 26% to 20.7mln boe (barrels of oil equivalent) last year

Prairie Provident Resources Inc (TSE:PPR) increased significantly its light oil reserves last year and remains a highly undervalued oil producer.

That's the view of broker Mackie, which repeated a  'buy' stance on the shares and targets C$2.

It comes after the group posted its  2017 year-end reserves evaluation from consultant Sproule and its guidance for this year's capital budget and guidance.

The oiler said proven plus probable (2P) reserves increased by 26% to 20.7mln boe (barrels of oil equivalent) last year.

"During 2017, PPR sold several noncore natural gas properties and acquired light oil assets at its Evi core area. As a result, the company’s weighting of light oil reserves increased to 73% from 62%.

Where does it operate..?

The firm combines organic growth with acquisitions of conventional oil prospects that bring additional development potential.

It is focused in the Wheatland and Princess in Southern Alberta, where it is targeting the Lower Mannville formation; along with an early stage waterflood project at Evi in the Peace River Arch.

It also holds around 240,000 net acres in the Utica shale in Quebec's Saint Lawrence lowlands.

Set to spend C$26mln on drilling..

Prairie Provident said it was fully funded for a 2018 capital budget at C$26mln, of which $25mln will be directed to the drilling of 15 wells (14.45 net) targeting light to medium oil locations in the Wheatland/Wayne and Princess areas.

The group will also continue its waterflood expansion at the Evi light oil property. Production is expected to average between 5,200 to 5,600 boe/d (barrels of oil equivalent per day) in 2018 weighted at around 70% to oil.

Trading below value..

Broker Mackie nopted that the group's 2P reserves of 20.7 mmboe have a a pre-tax discounted value of US$298 million, which equates to C$2.58 per share.

Notably, with its current share price of around C$50 per share, that means the firm is trading at a 39% discount of its proven developed producing (PDP) valuation of C$1.30.

What the broker also said..

"In 2017, PPR improved the quality of its reserves through divesting lower netback natural gas assets and by acquiring the long life, lower decline light oil asset within its Evi core area," said analyst Bill Newman.

"In 2018, PPR has an active drilling program which we expect to continue to grow oil production and reserves.  

"The company remains highly undervalued on a cash flow, reserves and NAV basis."

Newman also noted that there is no value in the current share price for the firm's Quebec assets or for the potential for a favourable ruling from the arbitration process.

The arbitration hearing relates to the expropriation of one of Prairie's blocks by the Quebec government in 2011.

Provident is seeking damages of US$188.9mln and although it may not get the full amount Mackie reckons damages of between US$25mln and US$60mln “would certainly be in the realm of possibility”.

"A ruling in PPR’s favour could have a major positive impact on the stock price. We reiterate our BUY recommendation and out $2.00 target price," the broker said.

Shares eased 2% to C$0.49.

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