Delphi Energy Corp.: Value play?
With last winter basically a no-show in much of North America, it’s no surprise that oil and natural gas prices fought a largely losing battle against warm weather.
As certain energy prices fell at various points during that time period, they also pulled down smaller oil and gas plays, leaving investors turned off. Add in service costs, rising debt levels, and Canada’s negative ruling on trusts late last fall, and it’s no surprise that smaller plays in the sector, as Acumen Capital Research notes, “…continue to experience significant disinterest from the market.”
Yet on the other side of the equation, there are enough positives that some juniors may offer real potential for value investors.
Take Delphi Energy Corp. (TSX: DEE). With some 80% of production coming from natural gas, Delphi is in a position to profit should prices rise. But the bigger part of the Delphi story is its focus on long-term organic growth, built around a large number of development opportunities. Delphi plans to leverage these with a high-impact development program, working with what it says is a five-year inventory of defined and repeatable growth opportunities.
Delphi’s capability to achieve that goal is backed up by its track record. Over the last four years, Delphi has seen a 104% growth in production per share, 174% growth in cash flow per share, and a 60% growth in net asset value per share.
Key for a gas developer are land assets and the ability to put them into production, and Delphi scores high on both measures. Not only did it expand its undeveloped land by 63% to 86,062 net acres in 2006, it had a 90% success rate from its participation in 52 wells.
This year, the focus is on low risk, high capital efficiency projects. The company is also aiming to work with existing infrastructure, much of it put into place in 2006. So far this year, the company has spent C$20 million, or 40% of its 2007 capital budget. The results have been an increase in production from 4,322 BOE/D (barrels of oil equivalent per day) in the first quarter to 5,100 BOE/D, with an additional 500 BOE/D scheduled to come on stream before the end of the second quarter.
Some 59% of current production comes from the Bigstone property in northwest Alberta. Noting its strong development potential and the current inventory of over 40 drilling locations, Delphi will spend between $14 million and $18 million there this year. Six wells have already been drilled, and up to six more locations will be drilled.
The second area of focus is Tower Creek, also located in northwest Alberta. On July 3 the company closed on a $10.2 million deal to boost its interest in the Leduc 2-21 well by 10.5% to 30.7%. The well went into production June 29, and should be producing some 25 million cubic feet per day - or 900 BOE/D net sales to Delphi - within weeks. A second deep exploration well is also currently being drilled at Tower Creek, and if successful could add net production of 300-400 BOE/D.
One possible concern is Delphi Energy’s debt load. However, much of this is attributable to the heavy capital commitment at the Bigfoot project in northeast B.C., of which some C$40 million were one-time, non-recurring expenses. Pointing to Delphi’s profitable hedging strategy, somewhat lower capital expenditures for 2007, and production in 2007, Acumen concludes, “…Delphi’s current debt levels are manageable.”
From a total BOE/D of 5,228 in 2006, Salman Partners is forecasting 5,200 BOE/D for 2007, and 6,000 for 2008. That meshes with the company’s own estimates, which see its total production capacity hitting 5,900 BOE/D once the Tower Creek comes on line. Accounting for summer maintenance and plant turnaround, Delphi is forecasting average production of 5,500 BOE/D in the third quarter, up from the estimated second quarter average of 5,250.
Delphi has 68 million shares outstanding. A year ago, the stock was just a few weeks away from its 52-week high of C$4.95. Since then it trended down, closing recently at C$1.79.
Analysts, however, see a strong further upside due to the quality of Delphi’s asset base, and growing interest from the market. In addition, the stock still trades at a discount to its net asset value, which, using an 8% discount rate, is reported at C$3.26 a share.
Salman Partners has a buy on the stock, with a C$3.00 target, based on a 4.5x multiple to its 2007 cash flow of C$0.69 a share. Acumen has a production estimate of 5,233 BOE/D in 2007 and 5,667 BOE/D in 2008. Projecting cash flow for 2008 of $54 million, or C$0.75 a share, Acumen has a target of C$2.80.
