Euro Pacific Initiates Coverage: BUY

An Emerging Eagle Ford Operator Offering Meaningful Upside Potential

We are initiating coverage on Sundance Energy (“SNDE”) with a BUY rating and a price target of $23. (SEA 31c) ... SNDE is an independent E&P operator with properties in the Eagle Ford play of South Texas and the Mississippian play in Oklahoma. The Eagle Ford properties include ~26,500 net acres in the company's core operating area in McMullen, Live Oak and Atascosa counties, Texas, and ~19,000 net acres in an emerging area in Dimmitt County, Texas. SNDE has identified a sizable inventory of economically attractive well locations on its core Eagle Ford leasehold, enabling the company to drill and maintain a flattish production profile even in a weak commodity price environment. Furthermore, we see significant upside potential from prospective well locations in Dimmitt County as improvement in well completion techniques is likely to enhance recovery and well economics. The company will be a pure-play Eagle Ford operator following the divestiture of Oklahoma properties, which are being marketed for sale.

Attractive core Eagle Ford well inventory.

SNDE has identified ~134 net Eagle Ford well locations on its core leasehold in McMullen/Live Oak and Atascosa counties, which translates to a ~12-year development inventory at the projected drilling pace of 10-12 net wells in 2017. The company's type-curve model for wells in McMullen County predicts an EUR of 476 MBOE (82% oil). Based on this type-curve, the wells are expected to have a breakeven oil price (when NPV@10% = $0) of $35/BBL, and a NPV@10% of ~$3.0MM and an IRR of ~45% at benchmark prices of $50/BBL for oil and $2.50/MCF for gas. While the product mix and EUR might vary in the core outside of McMullen County, the well economics are expected to be relatively similar.

SNDE may have meaningful upside from refracking of existing Eagle Ford wells.

SNDE is conducting a pilot program to test the upside potential of refracks in five existing horizontal Eagle Ford wellbores in McMullen County. The refracks were conducted during 3Q16 and the performance of the wells is now under observation. SNDE is looking for a 5x-6x increase in production rate and a 40%-50% increase in reserves, measured from the time of the refrack. If successful, the company estimates that it could have as many as 75 potential refrack opportunities on existing wells. SNDE looks to enhance upside potential for Dimmit County Eagle Ford well prospects with advanced well completion techniques and denser spacing.

In an effort to enhance well recovery and economics for Eagle Ford wells in Dimmit County, SNDE is incorporating many of the latest new generation well completion methods including increased proppant and fluid loads, tighter stage spacing, diverters and clay
stablizers. Using these methods, the company is looking for a 20%-35% increase in oil EUR. Ultimately, SNDE is trying to enhance the oil EUR/lateral-foot from 33MBBL/1,000-ft to 40-45 MBBL/1,000-ft, to make the well economics more competitive with those in the core area in McMullen County.

Strong production growth expected in 4Q16.

Backed by increased completion activity in 2Q16 and 3Q16, we expect sequential production growth of ~52% to 9,327 BOEPD in 4Q16. This is in line with the 4Q16 guidance range of 9,300-9,900 BOEPD. SNDE's plan to operate a one rig program in 2017 and drill 15-18 net wells is expected to maintain a flat to slightly growing production profile during the year from 4Q16 anticipated production.

Valuation.

Our price target of $23.00 is based on our NAV/Share estimate of $23.00 (see Exhibit 1) at ~$57.00/BBL flat benchmark oil price, which allocates $7.82 to proved reserves adjusted for balance sheet and other items, and $15.18 to upside potential from the unbooked Eagle Ford well locations.

All credit: Euro Pacific: James Musante