Calima Energy Ltd (ASX:CE1) is one of the cheapest Canada-focused oil and gas names according to Auctus Advisors, which has initiated coverage on Calima.
The report was published a few days before Calima resumed trading on the ASX as a conventional oil and gas producer focused on generating free cash flow from the development of assets in western Canada.
The following is an extract from Auctus’ report:
Calima Energy is an Australia listed ~US$50 mm market cap low risk conventional oil producer with ~26 mmboe WI 2P reserves in Canada and ~2.6 mboe/d WI production. Calima has taken advantage of the troubled Canadian oil sector to acquire the highly indebted Blackspur Oil at a very favourable price. With a prudently levered balance sheet and no exploration risk, the initial focus is to (1) >2x production by YE22 and (2) aggressively develop highly economic reserves that have been booked conservatively. Calima also offers exposure to ~1.5 tcf contingent resources in the Montney fairway (British Columbia), an area in which recent consolidation has taken place ahead of the completion of a large LNG export facility. Our A$0.035 per share target price reflects our ReNAV and implies over 5x upside.
Production and reserves growth on conventional assets
Brooks and Thorsby are two shallow producing fields (50-70% oil) in Alberta with ~60 producing wells and 26 mmboe 2P reserves reflecting 63 future drilling locations. Drilling 9 of these locations is forecasted to boost production to 3.5 mboe/d by YE21 and a further 15 wells could increase production to 5.5 mboe/d by YE22. With drilling cost of US$1.0-$2.5 mm per well, the production is highly cash generative even at WTI<US$50/bbl. With an additional 185 unbooked drilling locations, the reserves could grow an additional ~130%. There are four further sources of potential reserves upside: (1) the 2P reserves assume conservative recovery factors (~20% on the high quality reservoir pools at Brooks and <5% on tighter reservoirs elsewhere). x2 recovery factors would 2x the reserves. (2) The decline curves used to estimate the 2P reserves are conservative. (3) A large proportion of Brooks production comes from five conventional oil pools. Additional prospective pools, and pool extensions have been identified on 3D seismic. (4) Acquisition of adjacent leases would unlock further potential. The mineral owner of these lands is a royalty corporation looking to make deals.
Option on big liquid rich gas in an area subject to consolidation
Calima holds 100% WI in a development ready asset in the Montney fairway with 192.4 mmboe of 2C contingent resources including 44 mmbbl of liquids. The resources are strategically located for the upcoming LNG Canada facility. Calima is looking for an industry partner to co-develop these lands. We view this asset as option value on increasing gas price.
Value build-up
The placing price implies EV/DACF of only 1.4x in 2022 and EV/2P liquid reserves of <US$2/bbl, suggesting Calima is one of the cheapest Canadafocused names. Our 2P NAV based is A$0.016 per share. Adding the unbooked drilling locations would add A$0.027 per share. Success at the ongoing waterflood pilot and improved performance of new wells would increase recovery assumptions and add A$0.016 per share. We don’t carry any value for the Montney liquid rich gas. Our ReNAV is A$0.036 per share.