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We are discontinuing coverage on Raging River Exploration Inc. due to its acquisition by Baytex Energy Corp.1 (BUY, $8.00/sh target price). Accordingly, all prior research ratings, price targets, and earnings estimates must no longer be relied upon.
Raging River Exploration
Raging River reported second quarter financial and operating results that were in line with our estimates, highlighted by positive earnings generation in the period, illustrative of a highly economic top line revenue and enviable cost structure, coupled with affirmation of a disciplined acquisition strategy since inception. There are essentially zero changes to our forward outlook. We reiterate a $13.50/sh 12-month target price and Outperform ranking.
An increased 2016 budget prompts slight boost to production estimates, despite a modestly trailing 2Q16 production figure. Consolidation of land at Forgan is positive and consistent with Corporate aggregation strategy, further expanding the Viking footprint.
Impact: Neutral. 2Q16 production slightly trailed both FirstEnergy and consensus estimates, however, a modestly increased 2016 budget should bring annual production volumes above our prior expectations.
Raging River has entered into an agreement to acquire Rock Energy in an all share deal valued at $109 mm (inclusive of $67 mm in debt). Through this transaction, the Company adds 2,550 boe/d (95% oil), of which 1,950 bbl/d is outside Raging River’s core Viking asset base and producing from Rock’s heavy oil assets primarily at Mantario. Our proforma forecast portrays the transaction as 8% accretive to 2017e CFPS all while maintaining the Company’s balance sheet flexibility and strong production growth profile. We have increased our target price to $13.25 per share and are maintaining our Outperform recommendation.
Impact: Positive. The corporate acquisition of Rock Energy adds another layer of high quality, light oil Viking inventory at Kerrobert complementary to Raging River's existing position. While the market may be initially uncertain of the heavy oil barrels acquired from the Mantario pool, we view this as an opportunistic transaction at a low in the commodity cycle that may ultimately reside only temporary at Raging River. Further, tax pools of $208 mm will aid in reducing the Company's payable cash taxes in the near term, with our initial estimates pegging the value of these pools at ~$20 mm, a testament to the profitability of the business despite deteriorating crude prices.
Raging River reported first quarter financial and operating results that were in line to slightly below forecast, principally a function of its election to delay completion activity until 2Q16e on confirmation of crude oil price recovery.
Following our participatoon in Raging River’s $108.1 mm equity financing, issuing 12.5 mm share at $8.65 per share, we summarize the Company’s 4Q15 financial and operating results, which we view as in line with our prior estimates. Overall, incorporating 4Q15 results into our estimates along with the recently closed financing, we see our general outlook unchanged, absent some minor changes to pricing, costs and the signi cant reduction to net debt which has improved Raging River’s 2016e debt to trailing cash flow by ~70% to 0.3x and positioned the Company well in the current potentially acquisitor friendly environment.
Raging River’s reserve book coming out of 2015 is reflective of another year of predictable, efficient capital allocation. With capital outlays entirely discretionary, the Company is moving to a lower capex program for 2016e to $150-$160 mm, though a growth target of 16,500 boe/d is not materially different from its prior assertion (-3%). The Company continues to have the best balance sheet in its peer group far and away. An updated NAV continues to support a valuation level offering decent positive returns on a low risk-adjusted basis.
Impact: Positive. While a reduced capital investment outlook will likely induce downward revisions to our production and cash flow estimates, the decreased spending will also offer an improved financial position, which when coupled with stronger implied capital reinvestment efficiencies, should prove to be net positive for the stock on a risk adjusted basis, given the current environment.
Impact: Positive. Raging River's accretive acquisition of Anegada Energy for $126 mm adds ~280 net high quality Viking locations to the Company's drilling inventory at strong metrics. In addition, the Company's initial 2016e budget and guidance, including $190 mm in capital spending and annual volumes of 17,000 boe/d, appears in-line with our prior outlook after accounting for 2,750 boe/d of acquired Anegada production. Preliminary 2016e CFPS accretion would be approximately +4% per diluted share relative to our prior forecast on the current forward strip.
Raging River has reported second quarter financial results that were in line with our expectations, though ahead of consensus as measured within our Preview Facts dated July 23rd, 2015. There are no changes to its 2015e guidance at this juncture, though the Company does acknowledge lower well costs and even more efficient implied capital deployment materializing on cost deflation since the initial formulation of its growth targets, from which we would infer that a future guidance uplift is likely as 2H15e progresses.
Raging River has reported first quarter fi nancial results that were in line with expectations. There are no changes to its 2015e growth outlook, though the Company has moved its 2015e capital budget higher by $20 mm to initiate some specific waterflood initiatives which could be quite meaningful for the longer term intrinsic value premise in time.
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