Analyst Certification
Each research analyst and research associate who has authored a research report document certifies that the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed therein that are within the coverage universe.
Compensation of Analysts
The compensation of research analysts is intended to reflect the value of the services they provide to the clients of Wolverton Securities Ltd. As with most other employees, the compensation of research analysts is impacted by the overall profitability of the firm, which may include revenues from corporate finance activities of the firm's Corporate Finance department. However, Research analysts' compensation is not directly related to any specific corporate finance transaction.
Disclaimer
Estimates and projections herein are our own and are based on assumptions that we believe to be reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any security. As it acts for public companies from time to time, Wolverton Securities Ltd. may have a relationship with the above mentioned company(s). This report is intended for distribution in only those jurisdictions in which Wolverton is registered and any distribution outside those jurisdictions is strictly prohibited.
Research Dissemination Policy
Wolverton Securities Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax, email, or by posting to Wolverton’s proprietary websites.
Company Specific Disclosures
Wolverton Securities Ltd. has performed investment banking services for the following companies
during the preceding 12 months: RXR, CHQ. Wolverton Securities Ltd does not have a beneficial
ownership of greater than 1% of the securities in the above mentioned company(s). The analyst
responsible for this has not viewed the material operations of the above mentioned company(s) in
preparing this report. The analyst responsible for this report owns a long position in the shares of
Bengal Energy (BNG), Transglobe Energy(TGL), Canadian Spirit Resources (SPI) and Reece Energy
Exploration (RXR). No payment/reimbursement was received by the analysts for any expenses relating to
the production of this commentary. The security covered herein is not restricted and therefore OSC
Rule 56-501 does not apply.
Investment Ratings System
Return Ratings:
| Return Rating |
Rating Description |
Distribution |
| Buy |
We expect the stock to generate a total return of greater than 15% over the next 12 months. |
35% |
| Speculative Buy |
We expect the stock to generate a total return of greater than 15% over the next 12 months. However, there are significant unquantifiable risk(s) that may result in material loss. |
24% |
| Hold |
We expect the stock to generate a total return between 0% and 15% over the next 12 months. |
35% |
| Sell |
We expect the stock to generate negative returns over the next 12 months. |
0% |
| Under Review |
No rating is presently assigned. The stock is under review pending additional information. |
6% |
Wolverton’s system for rating investment opportunities defines four levels of expected performance based on the level of total return expected within 12-months.
The following table defines these ratings categories and highlights the distribution of our investment recommendations among them.
General Risk Factors:
Wolverton will conduct a comprehensive risk assessment for each company under coverage at the time of initiating research coverage and also revisit this assessment when subsequent update reports are published or material company events occur. Following are some general risks can adversely impact the companies’ future operational and financial performance and share price valuation: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the economy, interest rates, currency or major segments of the economy could alter investor confidence and investment prospects.
Wolverton’s Equity Research team provides institutional quality research with broad energy industry analysis and specific company coverage of a select universe of exploration and production and oilfield services companies with operations in Canada and Internationally.
Our research analysts employ a comprehensive three tiered company valuation system which yields a 12-month target share price, an assessment of potential total return relative to the company's industry sector, and a comprehensive assessment of risk.
Energy Sector Risks:
There are specific investment risks associated with oil and gas exploration and production (E&P) companies. These risks can adversely impact the company’s future operational and financial performance and share price valuation. Any of these risks can impact a company’s ability to meet targets and consequently could affect the company’s valuation and the investment return realized from holding a company’s shares.
Oil & gas companies share several risks that are inherent in all exploration and production activities, Wolverton will only address those risks that deserve special attention. Below are some of these common risks:
Drilling Risk:
A producer’s future production sustainability and growth is highly dependent on positive drilling results which are risky given the inability to know with certainty whether a specific well will encounter commercial quantities of hydrocarbons or the reservoir size if found. Producers with a relatively higher exploration focus expose investors to higher risk than those with more of a development focus. Smaller producers also experience higher drilling risk given the smaller number of wells drilled, relative to larger producers whose portfolio approach to drilling tends to diversify away much of this risk. Other related risks include timing factors resulting from variability in weather, rig availability, drilling complications, capital availability, partners issues and drilling location access.
Production Risk:
A company’s existing base production can also present risk given primarily the uncertainty of future reservoir performance, but also equipment failure, downstream infrastructure issues, environmental issues and partner or operator conflicts.
Competition:
Intense competition among producers for available land, prospects and assets could preclude a company from pursuing its growth strategy and impair potential project economics.
Key Employees:
Exploration and production companies have a very small number of employees relative to size of their operations and the size of their capital programs. Producers often have a number of key technical employees who are responsible for driving drilling success that is required for growth. The loss and replacement of any of these employees can either positively or adversely impact the types of plays that the company targets and the future growth rate of the company. Given the small size and head count of small producers, the loss of a key manager or employee can seriously impact the ability of a company to execute their strategies.
Capital Availability:
The growth profile of most small producers is highly dependent on its ability to invest in excess of its internally generated cash flows, implying that an impairment of general capital availability could impair a company’s ability to attract new capital at reasonable rates and its ability to invest and grow. Capital availability could be impacted adversely by factors such as a general capital market slowdown, a collapse in commodity prices, or a shift in the flow of capital to other more attractive sectors.
Geopolitical/Fiscal Regime:
This risk assesses a company’s relative exposure to risks associated with operating in certain geographic regions which may involve uncertainty around regulatory or fiscal regimes, dealing with various political or indigenous groups, or operating in frontier or international regions.
Commodity Price Risk:
A company’s revenue and ultimately its ability to reinvest and grow are reliant on the prices received for its oil, NGLs, and natural gas production. The markets for these energy products are highly volatile and impacted greatly by both North American and global supply / demand fundamentals which are generally beyond the control of management. Producers of all sizes are generally exposed to average commodity price risk, although risk management (hedging) activities could yield below average risk exposure, while a high weighing to either oil or natural gas or exposure to heavy oil could yield above average risk. For clarity, this risk factor is not an assessment of the general commodity price risk exposure of the energy sector, but rather is an assessment of a specific company’s commodity risk relative to the average producer.
Financial Risk:
A company’s net debt level relative to its capital structure and cash flow can be evaluated to determine if the company is exposed to an optimal level of financial leverage relative to its peers. Generally, the average producer maintains a capital structure that yields net debt to total capitalization ratio of 30-35% and debt/cash flow ratios of 1.0 to 1.2x.
Liquidity and Price Volatility:
The shares of smaller oil and gas producers will typically exhibit higher share price volatility, lower trading volumes and lower investment liquidity. We will generally rate the risk of these junior producers in this category as above average or speculative given that investment returns for these company’s tends to be highly variable and also that liquidating an investment position in these companies may be difficult given the low trading volumes.
