Sundance Energy (SEA)
Ops update shows continued success
SEA | ADD | current price: A$0.042 | target price: A$0.20 (previous: A$0.21) --> ADD (maintained) | current price: A$0.042 | target price: A$0.20 (previous: A$0.21)
§ SEA delivered positive operational results, bringing the 4-well James Keith Esse pad in Live Oak online during November, and the 2-well Hoskins pad in McMullen County in early December.
§ Like other recent Live Oak wells, these latest four wells sit above the assumptions used in our model for initial production (IP) and oil content.
§ We have flushed through lower 2019 oil prices, which has seen our price target move to A$0.20 (from A$0.21).
§ The recent disconnect between SEA's share price and operational results highlights an opportunity to add to positions at depressed levels.
Operational update
During November SEA brought online another 4-well pad in Live Oak County, the James Keith Esse wells. Three of the four wells had initial production (IP) during their first month above our modelled IP-30 of 1,000 barrels of oil equivalent per day (boe/d), while all four wells comfortably outperformed our forecasts for oil output (with the production containing 73-79% oil versus our modelled 63%). The update also showed 60-day and 90-day IP numbers for earlier wells SEA previously brought online, with nearly all wells showing a significantly 'gentler' rate of decline than we have modelled. This is material as it means production (in particular oil) for the year could be above guidance.
2019 development plan
Along with the ops update SEA is also reviewing its 2019 development plan. An advantage we previously highlighted is SEA's ability to slow development if market conditions remain volatile. This is primarily due to the fact that the majority of SEA's acreage is already held by production (HBP) (i.e. its lease obligations are already met). This could see SEA adjust its rate of development to conserve high-value Live Oak reserves rather than produce them in a lower oil price environment. Even so, with ~47% of 2019 production hedged between US$62-$67/bbl, we do not expect significant changes or any impact to our investment thesis on SEA.
Growing EBITDA even at US$40/bbl
In a low case scenario, even if oil prices fell to US$40/bbl and remained there for all of 2019, we expect SEA would still be able to develop 16-18 wells, still grow EBITDA on 2018 levels, and be funded by operating cash flow. This highlights the quality of SEA's Eagle Ford acres, with our expectation that SEA could comfortably fund its existing 2019 development plan of 35-40 wells spudded in 2019 at current spot oil prices.
Share price collapse vs operational success
In our view the market is underestimating SEA's ability to weather oil price volatility, with first maturity on its term loan ~4.5 years away. We struggle to understand what SEA's current share price is implying (sub-$40/bbl oil price into perpetuity) particularly if SEA maintains its current operational track record. As a result we view the strong weakness in SEA share price as an opportunity to add to positions. Our valuation-derived price target has been reduced to A$0.20 (from A$0.21) primarily due to lower 2019 oil price forecasts. Oil price is the key risk to our call.
