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Bill Barrett Corp. - Initiation Note

Bill Barrett Corporation

BUY (BBG, $7.14)

Wattenberg Based Producer Offers Additional Upside; Initiating BUY With $9 Price Target

January 26, 2017

Glenn Williams Jr.

212.417.3638

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We are initiating coverage on Bill Barrett Corporation with a BUY rating and $9 price target. Given Bill Barrett Corporation’s current price levels, and our expectations for increasing production and cash flows, we contend that the company is undervalued at current levels. We value BBG’s equity on the basis of daily production along with projected EBITDA, and proved reserves. Additionally, we compared BBG with a set of valuation multiples derived from a selection of industry peers. In doing so,we arrive at a value per share of $9, implying 26% additional upside, given today’s prices.

We expect BBG’s extended reach lateral drilling program, to generate positive operating margins at current prices. Additionally, we expect BBG’s hedges to protect the firm from sharp declines in oil prices. We estimate that the company hedged 45% of 4Q16 production at $72.57 per barrel, versus current spot prices of $52. Looking to 2017, BBG currently has 5,210 bbls per day hedged at $59.39 per barrel, representing 29% of our current production estimates. We expect that Barrett will layer on additional hedges throughout the year, with full year totals nearing 40%-50% of total daily production.

Furthermore, we contend that the environment for oil prices has improved of late, and note the recent decision by OPEC to reduce production amounts. While the “big hit”, announced by Saudi Arabia doesn’t seem nearly as substantial to us as it does to them (i.e. a 2% decline on an annual basis), we do see it as a positive sign for oil prices moving forward.

We base our price target on a blended average of BBG’s daily production, proved reserves, and projected EBITDA figures. In doing so, we arrive at a price target of $9 per share (Exhibit 10). Additionally, our model adds $4.65 for a working capital surplus, while deducting $7.23 per share for net debt. Thus, given the 26% implied upside to current prices, we initiate coverage on BBG with a BUY rating.

BBGSource: Capital IQ; National Securities Corporation


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