GMP Report on EMBER (EBR)
SELL SIDE COALBED METHANE CONFERENCE IN TORONTO TODAY
This afternoon, EBR management (Doug Dafoe, Chairman & CEO, and Terry Meek, President & COO)
is scheduled to present at a sell side coalbed methane conference in Toronto. The conference is
scheduled to have eight Canadian coalbed methane producers make presentations. We expect the
conference will have solid investor interest given the recent (Dec 14) land sale that raised record bonus
payments of almost $475 million. The record land sale was driven by the Mannville CBM plays and
brought continued strong investor interest in CBM plays. Please refer to our December 16 morning
comment “Coalbed methane: Dec 14 land sale produces record numbers plus more positive industry
disclosure post the sale”.
Sell side CBM conference to highlight dominant CBM
position and material production growth to 2009
• EBR has a large land position (>480 sections) in 3
industry active Mannville CBM play areas and in 1
industry active Horseshoe Canyon CBM play area
• Mgmt sees potential production growth of 5mmcf/d in
2006, >15 mmcf/d in 2007, >40 mmcf/d in 2008, and
>60 mmcf/d in 2009 based only on 50 sections of
Mannville and Horseshoe Canyon inventory
• EBR is moving ahead on commercial Mannville CBM
development at Rosalind in H2/06 with up to 18
horizontal wells (EBR 50% interest)
• Manola (on trend to industry Corbett success) CBM
demonstration results being held tight pending
upcoming land sales
• No change to BUY and $10.00 target
Industry disclosure since Dec 14 land sale provides increasing support that CBM
is working
As expected, there were Mannville CBM results being held confidential up until the land sale due to
competitive bidding reasons. But subsequent to the land sale, we have already seen positive
disclosure on a couple of plays. Immediately following the land sale results, EBR released positive
results at its Rosalind CBM demonstration project (see below for details). Earlier in January, Mahalo
Energy (CBM: BUY rating with a $10.00 target) issued an operations update that showed strong
production results from its initial Mannville horizontal coalbed methane well at its Corbett Creek
property. Mahalo reported that this well was producing at 500 mcf/d of gas after only one month of
dewatering, which is well above commercial rates.
PRESENTATION TO HIGHLIGHT DOMINANT LAND POSITION, MATERIAL UPSIDE POTENTIAL AND CONTINUED PROGRESS
TO REALIZE THE MATERIAL UPSIDE POTENTIAL
We believe the EBR presentation will highlight the material upside potential to EBR’s assets from four
major coalbed methane plays and, more importantly, that the company continues to get operational
results that move it along towards realizing this material upside potential.
A large CBM potential land position – 483 sections or 309,000 net acres in
Mannville CBM fairway means the market cap is essentially undeveloped land
value
EBR has one of the leading land positions in the Mannville CBM fairway, and this land position would
be very difficult, if not totally impossible to duplicate in our view. Following the Dec 14 land sale, EBR’s
land position increased to approximately 309,000 net acres or over 480 net sections of land in the
Mannville CBM fairway. The lands are in active industry CBM play areas: three are active for the
Mannville CBM plays (Manola, Rosalind, Fenn-Big Valley), and one is active for EBR’s existing
development drilling for Horseshoe Canyon CBM plays. EBR estimates that the average price paid by
industry at the Dec 14 land sale for Mannville CBM rights was $618/acre for undeveloped land.
Applying that value to EBR’s 309,000 net acres would equate to $191 million, which is just below EBR’s
current market cap of $241 million. And EBR has proven development drilling for Horseshoe Canyon
CBM and at least one commercial development for Mannville CBM at Rosalind. The land value used is
the average land price of $618/acre and not the price paid for some of the key parcels in the highly
prospective areas. For example, EnCana paid $1,500 per acre for some key Mannville CBM potential
lands offsetting EBR’s Fenn Big Valley lands.
Material upside potential from only 50 Mannville sections and existing Horseshoe
Canyon inventory
EBR management has been consistent in its indication that the company is at the early stages of
defining the potential of the company, and that the story will take several years to fully unlock the value
of the CBM potential. However, as noted previously, management gives a glimpse of the material
upside potential to EBR in the existing Horseshoe Canyon CBM inventory and a development of only
50 sections of Mannville CBM lands. As a reminder, management believes they have over 480
sections of land in the Mannville CBM fairway. In this potential scenario, management sees that
production could exceed 15 mmcf/d in 2007, exceed 40 mmcf/d in 2008, and exceed 60 mmcf/d in
2009. This would be material annual production increases, but more significantly, it would come from
the existing land inventory.
Operating results continue to keep EBR on the track to realizing the potential
material upside
The upside potential is significant, but the key to our bullish call on EBR is that investors continue to
see technical results that keep EBR on track to realize this material upside potential. We also continue
to hear feedback from EBR’s competitors on EBR’s operations that give us additional comfort.
Rosalind validated – commercial development in H2/06 with up to 18 horizontal
wells
EBR’s presentation provides one more step of progress at Rosalind with continued strong production
results in the South demonstration project that are leading the company to plan up to 18 horizontal
wells in H2/06 in the first commercial Mannville CBM development. This is another confirmed step
forward with a specific well program. In December, EBR had stated that “with continued production
success as indicated by the Rosalind demonstrations wells, Ember is preparing to move forward with
commercial development of its significant land base in the summer of 2006”. EBR now has the second
month of production at the south project and is clearly satisfied that the results support a more defined
well program for H2/06.
The two demonstration projects now have approximately two months of production. The south project
looks very good and has achieved commercial production rates of approximately 500+ mcf/d, which
compares to the Dec disclosed rates of 450 mcf/d. The south project plans up to 18 horizontal wells in
H2/06 in a combination of single laterals and multi-laterals. Reserves recognition in 2005 is expected to
be modest on a gross basis in 2005 and likely limited to only the one or two well spacing units in the
pilot demonstration project. We would expect that the reserves on a per-well basis will be in line with
EBR’s expectations.
There is no change to the north demonstration project rate 80 mcf/d. EBR remains encouraged by the
fact they are getting gas production, but is reviewing the operations to ensure there were no mechanical
reasons for the lower rates than expected.
Manola – results being held tight pending land sales
Similar to what was seen prior to the Dec 14 land sale, we do not expect to hear any specific results on
Manola until after land sales in March. In its demonstration project, EBR now has five vertical wells and
six horizontal wells. We believe there is good potential at Manola as EBR has 115,000 net acres of
CBM potential lands (all 100% interest) that are on trend with successful Nexen/Trident Corbett Creek
Mannville CBM development project. There are no results to date and none expected to be disclosed
today, but, EBR’s review of Manola is indicating the nature of a Phase 1 development in a potential
Manola development scenario. EBR is noting that with positive results, it would look for up to 18
horizontal wells in a Manola Phase 1 development. We continue to believe that on this large
contiguous land block with significant prior vertical well penetrations that it is difficult to see how EBR
will not have some commercial development somewhere on the block.
Fenn – Big Valley – Horseshoe Canyon continues to work, but Mannville CBM is
big potential upside
EBR has not yet moved on the Mannville CBM potential at Fenn – Big Valley, but this area has to be
considered to have big potential upside. The investor focus to date at Fenn-Big Valley has been for the
Horseshoe Canyon shallow CBM. EBR’s update notes there are 45 wells on stream at 2.5 mmcf/d and
there are 32 Q4 wells being put onstream that should add 2 mmcf/d by the end of Q1/06. There are 50
wells planned for 2006 in the shallow Horseshoe Canyon CBM and another 100 locations already
identified for 2007 and byond. But, the Dec 14 land sale highlighted the significant Mannville CBM
potential in this area. The most expensive land block sold went for $14.0 million, with an average price
of $3,754 per hectare ($1,500 per acre) for the Mannville CBM rights, and this block is adjacent to
EBR’s Fenn-Big Valley lands wherein EBR has both the Horseshoe Canyon and the Mannville CBM
rights
WE BELIEVE EBR WILL INCREASINGLY LOOK LIKE A TAKEOVER AS 2006 AND 2007 EVOLVE
We believe that EBR will increasingly look like a takeover target as 2006 and 2007 unfolds.
Unconventional gas plays (tight gas, gas shales, CBM) are the desired gas assets for the large North
American producers because once the resource is defined, then the producer can look to multi-year
growth. We see EBR as being a very logical takeover target as it defines its upside potential.
In addition, as noted above, the market cap of EBR is not that different from the average price paid for
Mannville CBM lands at the Dec 14 land sale. Using the higher parcel values would put the
undeveloped land at more than the current market cap of EBR. Potential buyers can already look at
one commercial development project (Rosalind) and there is the expectation of commercial
development on the Manola block somewhere; the Manola block being critical as it is 100% EBR lands.
We don’t expect the year-end reserves to provide any significant Mannville CBM reserves, but
management’s internal estimates of 1.2 tcf original gas in place for the four CBM plays provides an idea
of the large potential upside. And similar to what we expect with other CBM and SAGD producers, the
first indications from outside engineers will likely be on the resource potential of the lands as opposed
to reserve.
NO CHANGE TO FORECASTS
There is no change to our production estimates for 2005 and 2006. There may be minor adjustments
for the timing of the Horseshoe Canyon onstream dates, but they will not impact our view that this
company has material long term upside potential Our 2005 estimate for the stub year is 400 boe/d, and
resulting cash flow estimate of $1.7 million and $0.06 per share f.d.d. Our 2006 estimate is 5.0 mmcf/d
(833 boe/d) with cash flow of $8.4 million and $0.25 per share f.d.d. Based on our 2006 capex
assumption of $50 million we generate a year-end net debt position of $26.1 million or 3.1x trailing cash
flow.
The 2006 production forecast is only a portion of the potential growth over next
five years
It will take a few years for the production growth to reach its potential in our view. As noted previously,
management outlined a scenario of where production could be with 50 sections of Mannville coalbed
methane development and the existing Horseshoe Canyon inventory. Management estimates that its
production could exceed 15 mmcf/d in 2007, exceed 40 mmcf/d in 2008, and exceed 60 mmcf/d in
2009. This would be material annual production increases, but more significantly, it would come from
the existing land inventory. And that it is from a scenario of 50 sections developed, and management
believes it has tied up over 480 net sections in the Mannville CBM fairway.
Our $10.00 target price is 3.1x NAV
We continue to believe that it is appropriate to use a multiple of NAV as the primary guides to setting
target prices for new explorecos such as EBR that have the expectation of strong growth from an
excellent land and prospect inventory. Based on our NAV estimate of $3.25 per share our $10.00
target is 3.1x NAV. We believe this is appropriate given the large potential CBM resource, and the
expectation that EBR will move into commercial CBM development next summer. But our NAV could
be $7.00 per share using the Dec 14 land sale value. EBR now has approximately 309,000 net acres
of CBM potential lands.
We expect the stock to reflect the 2007 and 2008 potential over the next 12
months
We believe that EBR’s shares will increasingly reflect the potential for 2007 and 2008 growth over the
next 12 months. We do not expect cash flow multiples or other multiples to be the primary measure for
investors, rather investors will be attracted to the material potential upside from EBR’s Mannville CBM
exposure.
CONCLUSION/RECOMMENDATION
EBR has a large land position in the Mannvllle CBM fairway (480 net sections), an internal estimate of
1.2 tcf of original gas in place on its lands, and significant production growth potential to over 60 mmcf/d
in the next few years. There should not be any material new disclosure items in today’s presentation,
rather we will continue to see indications that EBR is moving ahead to define the material upside
potential in the CBM lands. We maintain our BUY rating and $10.00 target, which implies a 27%
return based on yesterdays closing price.
January 31, 2006 |
