Source and all credit: Brian Corales Scotia Howard Weil Energy...

Source and all credit: Brian Corales
Scotia Howard Weil Energy Analyst
(21st Nov 2016)

Extraordinarily Cheap Valuation: Target $28.00 [SNDE]

Sundance Energy Australia remains a SHW 'FOCUS STOCK': A 'focus stock' (FS) represents an analyst’s best idea(s); stocks in this category are expected to significantly outperform the average 12-month total return of the analyst’s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst.

Quick Take: While Sundance first went public on the Australian Exchange in 2004, the Company just started trading on the NASDAQ at the beginning of September. The first 2 ½ months have seen little stock liquidity on the U.S. exchange, but we do think that will increase over time. The most impressive thing to us is the Company’s eye opening valuation, which we believe is not sustainable for a U.S. shale player. We would be buyers today whether it is on the Australian exchange or the NASDAQ and are maintaining our Focus Stock rating and $28 price target. The stock is the cheapest in the Scotia Howard Weil coverage universe, despite having a 50% Y/Y production growth rate, fourth highest full cycle margins and is less than 2x debt-to-EBITDA.

Catalysts: The Company recently announced 3Q16 production of ~6 Mboepd, but we believe that increases ~60% to 9,500 Boepd in 4Q16. This puts them on a ~$100 MM EBITDA run rate for 2017 based on our $54 oil deck. They should monetize the Mississippi Lime assets for $15- $20 MM in the coming months, which adds to its liquidity for bolt-on assets/acceleration should prices warrant. The Company is actively looking for acquisitions, and we think SNDE could find assets to acquire around its core acreage, which would boost its inventory in the Eagle Ford. Depending on size, the Company could access the capital markets to purchase assets, which should help the U.S. trading volumes in the name. These events could ultimately lead to a more normalized valuation and higher stock price.

Balance Sheet/Liquidity: Sundances' balance sheet is good. The Company has $192 MM of debt and ~$20 MM of cash, although SNDE’s current liquidity is its cash balance. The Company plans to monetize its Mississippi Lime assets, which could be announced before year-end, and we think they get $15-$20 MM in proceeds. This could double its cash balance and position the Company to bolt-on to its Eagle Ford assets. The debt-to-2017 EBITDA is just 1.7x. We are assuming SNDE drills 15 net wells and spends ~$85 MM versus its cash flow of $87 MM.

Valuation: We cannot find a metric where SNDE does not look extremely attractive to us. It is currently trading at just 2.9x 2017 EBITDA and is trading at just $33k a flowing Boe, both are the lowest in the SHW oil universe. Further, even at our target price of $28, which is more than a double from the current price, the Company would only trade at 4.8x 2017 EBITDA, which would still be one of the lowest in the SHW universe.

Acquisitions: Sundance is not shy to say they are out looking for more Eagle Ford acreage. They have already increased from 7k net acres to 46k net acres over the last few years, and they are looking for more. SNDE is interested in both smaller bolt-on opportunities and bigger more transformative transactions. With an Eagle Ford acquisition, we think the Company could access the capital markets that could not only increase its low risk Eagle Ford inventory, but also help the stock liquidity in the U.S., which has been a hindrance for investors since the ADR listing in September.

Recent Industry Transaction Value: There have been a couple recent Eagle Ford deals. One in particular is very similar acreage to SNDE’s McMullen and Atascosa acreage position where the Company has at least 134 current locations. Currently, SNDE is trading at just ~$33,000 a flowing Boe so investors are paying very little for the inventory. If we applied the value above the production value assuming $30,000 a flowing Boe to just its 134 locations in McMullen and Atascosa and nothing to Dimmit, it would imply $323,000 a location. Further, if we applied that to all of the Eagle Ford inventory, it would imply just $123,000 a location.

The recent CRZO purchase, assuming $30,000 a flowing barrel for the production, implies $1.1 MM per location. If we just gave SNDE that value for its McMullen and Atascosa acreage and ZERO value for the 219 locations in Dimmit, it would imply a stock price of ~$21/share, or about a 70% increase to its current stock price. If we applied that value to all of its Eagle Ford, then it would imply a stock price of $40/share. No matter how you look at the valuation, it is entirely too cheap.

All the best, BF