Eagle Energy Trust (EGL-U:TSX) Last Close: $6.33 12-Month Target: $7.50 Recommendation: SPECULATIVE BUY Implied Total Return: 35.1% OIL & GAS RESEARCH Y COMPANY DESCRIPTION: EGL is an open-ended limited purpose trust (Mutual Fund Trust) focused on tax efficient distributions to unit holders from conventional, low risk oil & gas assets in the U.S. Trevor Reynolds Oil & Gas Research Analyst (403) 410-6842 treynolds@acumencapital.com Mike McMeeken Research Associate (403) 571-0530 mmcmeeken@acumencapital.com August 14, 2014 EGL Permian Disposition & Q2/14 Results EGL announced the disposition of their Permian asset base for gross proceeds of ~$US140 MM versus 2013 booked reserve value of ~$US97 MM; Proceeds net of deal costs ($US2.5 MM) and FX is ~$147.1 MM; Strong transaction metrics of ~$113,100/boe/d and ~$16.17/boe 2P; We view the disposition as a positive for EGL as the asset base was clearly not a fit at the current time; Proforma the deal, production is ~1,940 bbls/d with improved netbacks, cash of ~$US50 MM and bank line capacity of ~$50 MM; In conjunction with the deal EGL is eliminating the Premium DRIP which we view as a positive given the associated dilution at current prices; The focus is redeployment of funds within the next ~3 months; Q2/14 results mixed, but generally below our estimates; Guidance has been withdrawn for the time being; We make changes to our estimates to account for the disposition, elimination of the premium DRIP and quarterly results; and, We maintain a Speculative Buy recommendation and target price of $7.50/unit (7.1x 2015F EV/DACF). Market Data (C$) Market Cap (MM) $207.9 Basic Shares (MM) 32.8 F.D. Shares (MM) 36.0 52-week High/Low $9.05-$4.92 30-day Avg Daily Trading Vol 128,358 Capital Return 18.5% Cash Yield 16.6% Potential Return 35.1% Financial Data FYE: Dec. 31 2013A 2014E 2015E Oil/Liquids (bbl/d) 2,777 2,604 1,960 Gas (mmcf/d) 1.4 1.1 0.2 Boe/d (6:1) 3,004 2,785 2,000 % Oil & NGL's 92% 94% 98% Cash Flow (MM) $44.3 $41.2 $31.6 CFPS (FD) $1.43 $1.24 $0.91 Net Debt YE (MM) $77.0 -$61.4 -$42.1 Capex (MM) $66.1 -$117.3 $20.0 Valuation Data 2014E 2015E EV/DACF 3.8x 5.8x EV/Production (boe/d) $52,577 $82,861 Price/CF 5.1x 6.9x Net Debt/CF -1.5x -1.3x ACUMEN CAPITAL FINANCE PARTNERS LIMITED SUITE 700 404 6 th AVENUE SW CALGARY, AB T2P 0R9 MAIN PHONE: 403.571.0300 TOLL FREE: 1.888.422.8636
Page 2 of 6 EGL Announces Strategic Disposition. EGL has entered into an agreement to sell the Permian Basin assets (Midland) for gross proceeds of ~$US140 MM. We view the disposition as positive based on strong sale metrics and due to the fact the assets are presently not a good fit for EGL. The Permian basin is a high quality property, but not a strong fit for EGL s current corporate (high payout) structure for a number of reasons including; Steep initial declines require significant initial capital injection to build low decline production base, Horizontal drilling costs of ~$8 MM/well are excessive given an all-in 2013 capex program of ~$30 MM, EGL forced to drill vertically resulting in wells with a strong reserve life (40+ years) but long well payouts ~4+ years, Activity in the area resulting in cost pressures and decreasing availability of services, Orientation of EGL s land base minimized the potential number of long reach opportunities. Net proceeds from the sale, assuming deal costs of $US2.5 MM and CAD/US FX of 1.07 are ~$147.1 MM. Metrics on the sale are strong at ~$113,100/boe/d (production of ~1,300 boe/d), ~$16.17/boe 2P (~9.1 mmboe 2P booked reserves 2013). EGL received ~$US 42.7 MM above the value booked in the 2013 reserve report with the total sale value equal to ~$4.37/unit. Proforma Reserves and NAV. Proforma the disposition, reserves on a 2P basis fall by ~9.1 mmboe to ~5.2 mmboe. Oil weighting increases to ~100% from ~91%. We outline an updated NAV based on 2013 year end bookings with net debt and shares outstanding as of Q2/14. Proforma the deal we calculate an NAV increase to $7.07/sh. The build in NAV is attributed to underbooked value of the Permian and debt elimination. We outline our proforma calculation of reserve based NAV in figure 1. Figure 1: EGL Reserve Summary NPV 10% Reserve Value: Dec 31, 2013 Permian Divestiture* Proforma Disposition Reserve Summary: 2P Reserves ($MM) ($/Unit) ($MM) ($/Unit) ($MM) ($/Unit) P + P Reserves ($US) 269.7 8.01 97.3 2.89 172.4 5.12 FX Rate (CDN$/US$) 1.07 1.07 Undeveloped Land 0.0 0.00 0.0 0.00 0.0 0.00 Total Assets 288.5 8.57 97.3 2.89 184.4 5.48 Less: Net Debt -87.8-2.61 0.0 0.00 53.5 1.59 PV10 NAV 200.7 5.96 97.3 2.89 237.9 7.07 Units Outstanding at June 30, 2014 (MM): 33.7 *Booked Reserve Value Source: Company Reports, Acumen Capital (mboe) Total Reserves (Dec. 31, 2013) 14,329 Less: Permian Divestiture (9,100) Proforma Reserves 5,229 Proforma the Deal. Proforma the disposition, EGL is in a strong financial position with ~$50 MM of cash and $50 MM of debt capacity. Production from the remaining Salt Flat and Hardeman assets is ~1,940 bbls/d. Netbacks in the second quarter excluding the Permian assets would have been in the $60/boe range based on elimination of natural gas and NGL s. EGL s goal is to redeploy capital to assets more fitting to the corporate structure within the next three months. We believe there is a strong possibility capital will be deployed in Canada. In the meantime, EGL will continue to pay distributions and have set the level at $0.0875/unit for the next three months (unchanged). Effective September 1, 2014 the premium DRIP, which accounted for ~90% of total DRIP proceeds, will be eliminated. We view elimination of the premium DRIP as positive due to the associated dilution at current unit prices. Q2/14 Results. In addition to the Permian disposition, EGL announced Q2/14 results that were mixed, but generally below our estimates. Production for the quarter of 3,342 boe/d (91% oil/ngl s) beat our estimate. Realized pricing came-in below our estimate due primarily to weak realized liquids pricing. Operating netbacks of ~$48.05/boe (including hedging losses of $5.04/boe) came in ~10% below our estimate. CF for the quarter of $10.5 MM ($0.32/unit) came in ~10% below our estimate. We outline Q2/14 results in figure 2.
Page 3 of 6 Figure 2: Q2/14 Results Q2/14 Q/Q Y/Y Acumen Estimate Actual Variance Q1/14 Change Q2/13 Change Production Crude Oil and NGL's (bbl/d) 2,806 3,045 9% 2,791 9% 2,784 9% Natural Gas (mmcf/d)* 1.5 1.8 22% 1.3 35% 1.4 25% BOE/D 3,050 3,342 10% 3,010 11% 3,022 11% % Oil & NGL's 92% 91% (1%) 93% (2%) 92% (1%) Wellhead Prices Crude Oil and NGL's ($/bbl) 107.80 102.02 (5%) 103.38 (1%) 92.14 11% Natural Gas ($/mcf) 4.58 4.54 (1%) 4.96 (8%) 3.79 20% Financial Gross Revenue ($/boe) 101.37 96.18 (5%) 98.01 (2%) 86.68 11% Royalties ($/boe) 28.38 25.93 (9%) 26.19 (1%) 24.26 7% Operating Costs ($/boe) 16.50 17.16 4% 17.54 (2%) 10.22 68% Operating Netbacks ($/boe) 56.49 53.09 (6%) 54.28 (2%) 52.20 2% G&A ($/boe) 8.00 9.90 24% 9.43 5% 7.36 34% Hedging ($/boe) -2.94-5.04 71% -3.02 67% 0.67 (849%) Interest ($/boe) 3.57 3.57 0% 3.24 10% 1.71 109% Pre Tax Corp. Netback ($/boe) 41.97 34.58 (18%) 38.59 (10%) 43.80 (21%) Cash Flow ($MM) 11.6 10.5 (10%) 10.3 1% 12.0 (13%) Cash Flow per Unit (fd) 0.35 0.32 (9%) 0.32 (0%) 0.39 (20%) Net Debt ($MM)* 89.1 87.8 (1%) 89.8 (2%) 50.3 75% Debt/ Cash Flow 1.9x 2.0x 8% 2.1x (5%) 1.1x 92% E&D Capex ($MM) 7.6 6.4 (15%) 11.5 (44%) 13.8 (53%) Net Capex ($MM) 7.6 6.5 (14%) 16.8 (61%) 22.6 (71%) Wt. Avg Basic Shares (MM) 33.3 33.0 (1%) 32.4 2% 30.3 9% * Excludes unrealized hedging and unit based compensation. Source: Acumen Capital, Company reports Updated Estimates. Of note, Management has withdrawn guidance for the time being given the acquisition. We make changes to our estimates to account for the disposition, elimination of the premium DRIP and results from the quarter. The disposition is expected to close by month end while management expects to redeploy capital within the next three months. We expect estimates to change significantly moving forward. We outline the changes to our estimates in figure 2.
Page 4 of 6 Figure 2: EGL Reserve Summary Source: Company Reports, Acumen Capital 2014F 2015F New Old % change New Old % change Oil (boe/d) 2,604 2,944-11.5% 1,960 3,082-36.4% Gas (mmcf/d) 1.1 1.5-29.3% 0.2 1.6-85.1% Production (boe/d) 2,785 3,200-13.0% 2,000 3,350-40.3% Net Debt ($MM)* -61.4 76.3-180.5% -42.1 69.8-160.4% Net Debt/CF (1.5x) 1.6x -193.4% (1.3x) 1.4x -194.4% Total Capex ($MM) -117.3 30.6-483.8% 20.0 28.0-28.6% E&D Capex ($MM) 25.3 25.3 0.0% 20.0 28.0-28.6% Cash Flow ($MM) 41.2 47.8-13.8% 31.6 49.3-36.0% CFPS (b) 1.24 1.42-12.3% 0.91 1.33-31.3% CFPS (fd) 1.24 1.41-12.1% 0.91 1.33-31.1% WA Units Outstanding (b) 33.1 33.7-1.8% 34.6 37.1-6.9% Payout Ratio 84% 74% 14.0% 115% 79% 45.6% Payout Ratio (Net of Drip) 45% 28% 58.5% 25% 25% 0.0% Sustainability Ratio nm 138% nm 178% 136% 31.4% Sustainability Ratio (Net of Drip) nm 92% nm 161% 87% 85.7% *(Net debt excludes unrealized hedges and marked to market compensation) RECOMMENDATION AND INVESTMENT CONCLUSION We see the Permian disposition and elimination of the Premium Drip as positives for the reasons outlined in our report. Our focus shifts to the redeployment of funds which has the potential to come in any number of different forms. We remain Speculative Buy rated with a target price of $7.50/unit (7.1x EV/DACF 2015F).
Page 5 of 6 Company: Eagle Energy Trust. Is this an issuer related or industry related publication? Issuer Industry Does the Analyst/Associate have a financial interest in securities of the subject issuer? Is Acumen Capital Partners a market maker in the issuer s securities at the date of this report? Does Acumen Capital Partners beneficially own more than 1% of any class of common equity of the issuer? Does Acumen Capital Partners or the Analyst/Associate have any actual material conflicts of interest with the issuer? Explanation: Does the Analyst/Associate or Household member serve as a Director, Officer, or Advisory Board Member of the issuer? Has the Analyst/Associate received any direct compensation from the subject company in the past 12 months?* Has Acumen Capital Partners managed or co-managed an offering of securities by the issuer in the past 12 months? Has Acumen Capital Partners received compensation for investment banking and related services from the issuer in the past 12 months? Other disclosures: Acumen has a pool for compensation purposes, which includes research analysts, investment banking personnel, salespeople and institutional traders. Revenue in the pool includes trading commissions, advisory fees, new issue commissions and broker warrant proceeds. Acumen Recommendation Structure: Buy Speculative Buy Hold Sell Under Review Tender Full Recommendation Structure explanation can be found at the Acumen Capital Partners website: www.acumencapital.com The information transmitted is privileged, confidential, may be subject to copyright and is intended solely for the use of the individual or entity to which the transmission is addressed. This transmission is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited, nor in any jurisdiction where Acumen is not registered to do so. Views expressed are those of the sender and not necessarily those of Acumen Capital Finance Partners Limited or its subsidiaries. Any unauthorized use, distribution, review or disclosure is prohibited. If you received this in error, please notify the sender and delete or destroy this message and any copies. Acumen does or seeks to do business with companies covered in our research comments and reports. As a result, investors should be aware that the firm may be in a conflict of interest. Investors should consider this report as only a single factor in making their investment decision 2014.
Page 6 of 6 ACUMEN CAPITAL STAFF LIST RESEARCH Brian D. Pow, MBA Vice President Research, Equity Analyst (403) 571-0303 bdp@acumencapital.com Trevor Reynolds Oil and Gas Research Analyst (403) 410-6842 treynolds@acumencapital.com Mike McMeeken Research Associate (403) 571-0530 mmcmeeken@acumencapital.com Mark Zalucky Research Associate (403) 410-6840 mzalucky@acumencapital.com INSTITUTIONAL SALES Brian Parker President & CEO, Institutional Sales (403) 571-2514 bparker@acumencapital.com Douglas S. Gowland, C.A., CFA Vice President, Institutional Sales (403) 571-0317 doug@acumencapital.com Andre Drouillard, CFA Institutional Sales (403) 571-0685 andre@acumencapital.com Robert Cooper, CFA Institutional Sales (403) 571-0324 rcooper@acumencapital.com Liam Farrell Head Trader (403) 571-0318 lfarrell@acumencapital.com David Waite Institutional Trading (403) 410-6730 dwaite@acumencapital.com Jesse Ahlan Institutional Trading (403) 571-0148 jahlan@acumencapital.com Crystal Bellefountaine Associate (403) 571-0314 cbellefountaine@acumencapital.com INVESTMENT BANKING Kelly Hughes Vice President, Investment Banking (403) 571-5036 khughes@acumencapital.com Ian Thomson Vice President, Investment Banking (403) 571-0301 ian@acumencapital.com Shawn Ostrow Investment Banking Associate (403) 571-0319 sostrow@acumencapital.com RETAIL SALES Robert Laidlaw Vice President (403) 571-2522 rlaidlaw@acumencapital.com Imran Mulji Investment Advisor (403) 571-0112 imulji@acumencapital.com Margaret MacBurnie Investment Advisor Assistant (403) 441-0536 mmacburnie@acumencapital.com Sheldon LeLievre Vice President, Sr. Investment Advisor (403) 571-0315 sheldon@acumencapital.com Craig Madill Investment Advisor (403) 410-6018 cmadill@acumencapital.com Erin Williams Investment Advisor Assistant (403) 571-2416 ewilliams@acumencapital.com Donny Woo Vice President, Sr. Investment Advisor (403) 571-2510 donny@acumencapital.com Darren Fong Investment Advisor (403) 441-2754 dfong@acumencapital.com Alan Tolg Investment Advisor (403) 410-2042 atolg@acumencapital.com Ron Cairns Investment Advisor (403) 410-2040 rcairns@acumencapital.com Scott Barnett Investment Advisor (403) 571-0532 sbarnett@acumencapital.com Curtis Schirrmacher Investment Advisor (403) 571-0113 curtiss@acumencapital.com Grant Gowland Associate (403) 441-0537 ggowland@acumencapital.com TREASURY AND OPERATIONS Cindy Marthaller Operations Manager (403) 571-8045 cindy@acumencapital.com Myja Miller CFO, COO, CCO (403) 571-0308 mmiller@acumencapital.com Krystine Hebert Client Services (403) 571-0300 khebert@acumencapital.com Acumen Capital Finance Partners Limited Suite 700, 404 6 Avenue SW Calgary, AB T2P 0R9 Main Phone: 403-571-0300 www.acumencapital.com