Liquids Rich Production Mix Should Drive Long Term Growth; Hedged Oil Above $90 Should Lessen Short Term Price Risk Initiating Coverage With a BUY Rating and $27 Target
December 18, 2014
Glenn Williams Jr.
We are initiating coverage on Stone Energy with a BUY rating and $27 price target. We find SGY attractively priced at its current valuation, as we contend that the firm is not receiving credit for its current base of proved reserves, and resultant cash flow. Moreover, the company trades at a discount to peers on both an Enterprise Value (EV) to flowing barrel (Boe) and EV to PV-10 basis. We use a Net Asset Value (NAV) approach to arrive at our price target, using SGY’s audited reserve figures, while accounting for undeveloped acreage, working capital, and net debt.
Our NAV estimate (See exhibit 7) assigns $25.97/share in value to the company’s current production and reserves, $5.47 to the company’s Marcellus prospects, and $2.98 to the company’s deep water activities. Our model includes $8.34 for working capital and undeveloped acreage, while deducting $15.62 for net debt. Our NAV model assumes short term prices of $63/bbl for oil, escalating to $75/bbl (in line with the current Brent futures strip). We assume short term prices of $3.74/Mcf for natural gas escalating to $5.00, and $29.98/Bbl for natural gas liquids (NGL’s), also reflecting current strip prices. Additionally, our $27 price target equates to a peer multiple of 4.2x our 2015 discretionary cash flow per share (DCF) figure of $6.45/share. In doing so, we arrive at a value of $27 per share, implying 60% upside given the company’s current price of $16.88/share.
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