cen dl110309 - a win and a win

7/31/2019 Cen Dl110309 - A Win and a Win

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Daily Letter | 110 March 2011

CanaccordCanaccordCanaccordCanaccord GenuityGenuityGenuityGenuity is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF.is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF.is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF.is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF. : AIM): AIM): AIM): AIM)

The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal,The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal,The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal,The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal,independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For impindependent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For impindependent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For impindependent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For importantortantortantortantiiiinnnnffffoooorrrrmmmmaaaattttiiiioooonnnn,,,, pppplllleeeeaaaasssseeee sssseeeeeeee tttthhhheeee IIIImmmmppppoooorrrrttttaaaannnntttt DDDDiiiisssscccclllloooossssuuuurrrreeeessss sssseeeeccccttttiiiioooonnnn iiiinnnn tttthhhheeee aaaappppppppeeeennnnddddiiiixxxx ooooffff tttthhhhiiiissss ddddooooccccuuuummmmeeeennnntttt oooorrrr vvvviiiissssiiiitttt CCCCaaaannnnaaaaccccccccoooorrrrdddd GGGGeeeennnnuuuuiiiittttyyyyssss OOOOnnnnlllliiiinnnneeee DDDDiiiisssscccclllloooossssuuuurrrreeeeDDDDaaaattttaaaabbbbaaaasssseeee....

Annual EPSAnnual EPSAnnual EPSAnnual EPS Cash FlowCash FlowCash FlowCash Flow Rating/TargetRating/TargetRating/TargetRating/Target

Changes2011E $0.53 from $0.57

2012E $0.76

2011E $187.3 from $206.9

2012E $246.8

No change

Coastal Energy Company

CEN : TSX-V : C$6.87

CEO : AIM

BUY

Target: C$9.25

Melanie Love, CFAMelanie Love, CFAMelanie Love, CFAMelanie Love, CFA 1.403.508.3839

[email protected]

Ana WesselAna WesselAna WesselAna Wessel 1.403.508.3837

[email protected]

COMPANY STATISTICS:

Forecast Return %: 35%

Avg. Daily Vol. (000s): 271.5

Shares Out: 109.6

Shares Out: 114.6

Market Cap C$: $753.0

Net Debt (M) C$: $76.3

Enterprise Value (M) C$: $829.4

52-week Range: $3.02 - $8.20

EARNINGS SUMMARY:

FYE DecFYE DecFYE DecFYE Dec 2009A2009A2009A2009A 2010E2010E2010E2010E 2011E2011E2011E2011E 2012E2012E2012E2012E

Oil (bbl/d): 4,724 7,593 10,500 11,200

Nat Gas (mmcf/d): 0 0 0 0

Total (boe/d): 4,724 7,593 10,500 11,200

NAV fd $: $6.27

P/NAV (x): 1.1 na na na

CFPS fd $: 0.38 1.15 1.63 2.06

P/CF (x): 18.9 6.2 4.3 3.4

EV/DACF (x): 20.2 6.5 4.3 2.8

EPS fd $: $0.00 $0.26 $0.53 $0.76P/E (x): nm 27.6 13.3 9.3

SHARE PRICE PERFORMANCE:

COMPANY DESCRIPTION:Coastal Energy conducts production and exploration activities in5,021 square kilometres offshore Thailand, where it has a 100%interest. It is developing and appraising two oil fields, Songkhlaand Bua Ban, which produce 10,500 Bbl/d currently. Thecompany has an inventory of exploration prospects in itsunderexplored offshore acreage.All amounts in C$ unless otherwise noted.

Energy -- Oil and Gas, Exploration and Production

A WIN AND A WIN

Investment highlights

Exploration SuccessExploration SuccessExploration SuccessExploration Success: Coastal reported a dual-zone discovery at BuaBan North A-01. The well encountered pay in two upper zones, the

Miocene and the Upper Oligocene, as well as pay in the deeper

Eocene.

Frac SuccessFrac SuccessFrac SuccessFrac Success: The company also announced that its single stagefracs were successful at Bua Ban, where both wells are flowing back

oil and frac fluid. Especially encouraging is the A-07 rate of 270

bbl/d of oil at a 60% oil cut with frac fluid. This well did not

produce pre-frac. No rates are out yet for the A-04.

IntroducingIntroducingIntroducingIntroducing 2012 estimates2012 estimates2012 estimates2012 estimates: We are estimating production of10,965 bbl/d for 2012, solely based on development locations. This

production rate spins out cash flow of $2.06 per fully diluted share

based on our price deck of $92.50/bbl oil in 2012. We estimate the

company will spend $120 million in capex and exit the year with net

cash of $85.3 million. Please refer to Figure 1 for a full summary of

the estimates.

Valuation and recommendation

We reiterate our BUY recommendation and C$9.25 target price. Our

target price is based on a 5.4x multiple to our 2011 fully diluted CFPS

estimate of $1.63 and represents 1.5x its booked year-end 2009 NAVPS

of $6.27 and approximates our estimated portfolio NAV of $9.55 pershare, fully diluted.

All of our production and cash flow estimates are based solely on

development activity no exploration success has been included. This is

true of the successes noted above until we have actual flow rates to

factor in.
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EXPLORATION SUCCESSES

New discovery at Bua Ban North

The A-01 exploration well (A-01) encountered 32 and 27 feet of net oil pay in the Mioceneand Upper Oligocene zones, respectively, both with 25% average porosity. The Eocene

interval also encountered 70 feet of pay oil but was found 700 feet deeper than expected

and is not expected to flow naturally. Unfortunately, the main Lower Oligocene zone was

breached at this level and was wet.

A MOPU is currently being mobilized to begin flow testing the well once site preparations

are made.

A second exploration well at Bua Ban North (A-02) has also begun and will test multi-zone

potential adjacent to the A-01 location in a different fault block.

Successful fracs

A single stage frac was completed on two wells at Bua Ban, the non-producing A-07 andthe producing A-04.

The A-07 well is currently producing 270 bbl/d of oil at a 60% oil-cut in the Oligocene. The

remaining volumes are still frac fluids as the well continues to clean up after the

installation of a downhole ESP. This well was drilled in August 2010 and encountered a

100 foot oil column in the Oligocene but was tight and did not flow naturally.

An ESP is currently being installed on the A-04 well that flowed at 80 bbl/d pre-frac from

the Eocene zone. The well was flowing back frac fluid and oil at a 50% ratio before being

shut in for the pump installation.

No flow rates have been given for the A-04 but we are very optimistic given the success of

the A-07 well that didnt flow at all pre-frac.

Non-commercial success

The Benjarong A-01 well is producing 200 bbl/d of fluid at a 95% oil cut after a frac job.

Unfortunately, this is a sub-economic rate.

The Benjarong A-02 well was acidized without success.

PRODUCTION UPDATE

Total offshore production is approximately 10,500 bbl/d.

Songkhla

The sidetrack of the Songkhla A-07 well into the A-09 fault block encountered 45 feet ofnet pay in the Lower Oligocene at 18% porosity and 33 feet of net pay in the Eocene at 17%

porosity. The well was completed and flow tested at 800 bbl/d, whereas it intermittently

produced 150 bbl/d before being shut in before the sidetrack a pretty good trade in our

books.

Production from the A-12 well has been tied in and is flowing at approximately 1,600

bbl/d. The A-11 well is producing 150 bbl/d in the Eocene interval with a perforation in

the 44 feet of pay in the Oligocene interval with a workover unit still to come.


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Current production at Songkhla is approximately 8,500 bopd.

Bua Ban

Current production at Bua Ban, excluding the A-04 and A-07, is approximately 2,000 bopd

with four wells producing.

OPERATIONAL AND FINANCIAL ESTIMATES

We are introducing our 2012 estimates at this time and tweaking our 2011E average based

on the drilling calendar to date, which pushes out the development timing guidance from

last fall.

That said, the recent Bua Ban North exploration success and Bua Ban production from

fraced wells could have an impact very soon. In the absence of flow rates and tie-in dates,

we are choosing to err on the side of conservatism.

All of our production and cash flow estimates are based solely on development activity no

exploration success has been included.We have applied the Canaccord Genuity price deck of $87.50/bbl in 2011 and $92.50/bbl

in 2012.

Figure 1: Operational and financial estimates

2009A2009A2009A2009A 2010E2010E2010E2010E 2011E2011E2011E2011E 2012E2012E2012E2012E

Production

Oil & Liquids (bbl/d) 4,724 7,593 10,500 11,200

Natural Gas (mmcf/d) 0.0 0.0 0.0 0.0

Total (boe/d)Total (boe/d)Total (boe/d)Total (boe/d) 4,7244,7244,7244,724 7,5937,5937,5937,593 10,50010,50010,50010,500 11,20011,20011,20011,200

Financials

Cash flow ($mm) $36.9 $130.0 $187.3 $246.8

CFPS (FD) $0.38 $1.15 $1.63 $2.06

Net Income ($mm) ($0.1) $29.1 $61.6 $91.1

EPS (FD) ($0.00) $0.26 $0.53 $0.76

Capital Expenditures ($mm) $77.7 $136.8 $150.0 $120.0

Net Debt ($mm) $57.1 $78.7 $41.5 ($85.3)

Debt-to-Cash Flow Trailing (x) 1.5x 0.6x 0.2x na

Net Asset Value - 2P ($mm) $6.27 na na na

Price to CFPS 18.9x 6.2x 4.3x 3.4x

Market Cap - (U$) $776.5 $776.5 $776.5 $776.5

Enterprise Value (U$) $833.6 $855.2 $818.0 $691.2

EV/DACF 20.2x 6.5x 4.3x 2.8x

P/NAV 1.13x na na na

P/E nm 27.6 13.3 9.3

EV/BOEPD $176,437 $112,632 $77,900 $61,711 Source: Company reports, Canaccord Genuity estimates


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Figure 2: Changes to 2011E estimates

2011E 2011E Difference % Change

New Old

ProductionProductionProductionProduction

Oil & Liquids (bbl/d) 10,500 11,650 (1,150) -10%

Natural Gas (mmcf/d) 0 0 0

Total (boe/d)Total (boe/d)Total (boe/d)Total (boe/d) 10,50010,50010,50010,500 11,65011,65011,65011,650 (1,150) -10%

FinancialsFinancialsFinancialsFinancials

Cash flow ($mm) $187.3 $206.9 ($19.7) -10%

CFPS (FD) $1.63 $1.77 ($0.14) -8%

Net Income ($mm) $61.6 $68.7 ($7.1) -10%

EPS (FD) $0.53 $0.57 ($0.04) -7%

Capital Expenditures ($mm) $150.0 $150.0 $0.0 0%

Net Debt (cash) $mm $41.5 $21.8 $19.7 90%

Debt-to-Cash Flow Trailing 0.2x 0.1x Source: Canaccord Genuity estimates

RECOMMENDATION

We maintain our BUY recommendation and C$9.25 target price, which is based on

estimated risked upside exploration potential plus Coastals 2009 booked year-end NAV of

$6.27.


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Investment risks

As an international oil and gas company, Coastal is subject to the following risks:

Commodity prices

Coastal is exposed to the prices for crude oil and natural gas, which determine its

revenues. Adverse changes in these commodities could impact Coastal Energy's cash flow

and profitability.

Currency risk

Coastal operates in US dollars, Thai baht, British pounds, Canadian dollars and euros. It

does not engage in hedging activities to mitigate the impact of adverse fluctuations in these

currencies.

Thailand political, legal, and regulatory regime

Adverse changes to the business environment, contract sanctity, or changes in regulations

or fiscal terms could impact Coastal's ability to execute its business plan or the profitability

of the business plan.

Operational risks

Operational risks could occur in the process of securing high-quality exploration assets,

conducting geological/geophysical evaluations, carrying out drilling programs for

exploration and development, putting wells on production and delivering cargoes for sale.

Interest rate risk

The company has entered into an interest rate swap on half of the expected loan amount

per the loan agreement with BNP. The company is exposed to interest rate risk on its

outstanding borrowings and short-term investments.


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APPENDIX: IMPORTANT DISCLOSURES

Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this investmentresearch hereby certifies that (i) the recommendations and opinions expressed in this investment researchaccurately reflect the authoring analysts personal, independent and objective views about any and all of thedesignated investments or relevant issuers discussed herein that are within such authoring analysts coverageuniverse and (ii) no part of the authoring analysts compensation was, is, or will be, directly or indirectly,related to the specific recommendations or views expressed by the authoring analyst in the investmentresearch.

Site Visit: An analyst has not visited Coastal Energy's material operations.

Price Chart:*

Distribution of Ratings:

Global Stock Ratings(as of 3 March 2011)

Coverage UniverseCoverage UniverseCoverage UniverseCoverage Universe IB ClientsIB ClientsIB ClientsIB Clients

RatingRatingRatingRating #### %%%% %%%%

Buy 447 58.7% 36.9%

Speculative Buy 62 8.1% 66.1%

Hold 237 31.1% 17.3%

Sell 15 2.0% 6.7%

761 100.0%

Canaccord Ratings

System:

BUY:BUY:BUY:BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.HOLD:HOLD:HOLD:HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.SELL:SELL:SELL:SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.NOT RATED:NOT RATED:NOT RATED:NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.

Risk-adjusted return refers to the expected return in relation to the amount of risk associated with thedesignated investment or the relevant issuer.

Risk Qualifier: SPECULATIVE:SPECULATIVE:SPECULATIVE:SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamentalcriteria. Investments in the stock may result in material loss.


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Canaccord Research Disclosures as of 10 March 2011

CompanyCompanyCompanyCompany DisclosureDisclosureDisclosureDisclosureCoastal Energy CompanyCoastal Energy CompanyCoastal Energy CompanyCoastal Energy Company 4, 7, 11 (John Zaozirny)4, 7, 11 (John Zaozirny)4, 7, 11 (John Zaozirny)4, 7, 11 (John Zaozirny)

1 The relevant issuer currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated

companies. During this period, Canaccord Genuity or its affiliated companies provided the following servicesto the relevant issuer:

A. investment banking services.

B. non-investment banking securities-related services.

C. non-securities related services.

2 In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation forCorporate Finance/Investment Banking services from the relevant issuer.

3 In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-leadmanager or co-manager of a public offering of securities of the relevant issuer or any publicly disclosed offerof securities of the relevant issuer or in any related derivatives.

4 Canaccord Genuity acts as corporate broker for the relevant issuer and/or Canaccord Genuity or any of itsaffiliated companies may have an agreement with the relevant issuer relating to the provision of CorporateFinance/Investment Banking services.

5 Canaccord Genuity or any of its affiliated companies is a market maker or liquidity provider in the securitiesof the relevant issuer or in any related derivatives.

6 In the past 12 months, Canaccord Genuity, its partners, affiliated companies, officers or directors, or anyauthoring analyst involved in the preparation of this investment research has provided services to therelevant issuer for remuneration, other than normal course investment advisory or trade execution services.

7 Canaccord Genuity intends to seek or expects to receive compensation for Corporate Finance/InvestmentBanking services from the relevant issuer in the next six months.

8 The authoring analyst, a member of the authoring analysts household, or any individual directly involved inthe preparation of this investment research, has a long position in the shares or derivatives, or has any otherfinancial interest in the relevant issuer, the value of which increases as the value of the underlying equityincreases.

9 The authoring analyst, a member of the authoring analysts household, or any individual directly involved inthe preparation of this investment research, has a short position in the shares or derivatives, or has anyother financial interest in the relevant issuer, the value of which increases as the value of the underlyingequity decreases.

10 Those persons identified as the author(s) of this investment research, or any individual involved in the

preparation of this investment research, have purchased/received shares in the relevant issuer prior to apublic offering of those shares, and such persons name and details are disclosed above.

11 A partner, director, officer, employee or agent of Canaccord Genuity and its affiliated companies, or amember of his/her household, is an officer, or director, or serves as an advisor or board member of therelevant issuer and/or one of its subsidiaries, and such persons name is disclosed above.

12 As of the month end immediately preceding the date of publication of this investment research, or the priormonth end if publication is within 10 days following a month end, Canaccord Genuity or its affiliatecompanies, in the aggregate, beneficially owned 1% or more of any class of the total issued share capital orother common equity securities of the relevant issuer or held any other financial interests in the relevantissuer which are significant in relation to the investment research (as disclosed above).

13 As of the month end immediately preceding the date of publication of this investment research, or the priormonth end if publication is within 10 days following a month end, the relevant issuer owned 1% or more ofany class of the total issued share capital in Canaccord Genuity or any of its affiliated companies.

14 Other specific disclosures as described above.

Canaccord Genuity is the business name used by certain subsidiaries of Canaccord Financial Inc., includingCanaccord Genuity Inc., Canaccord Genuity Limited, and Canaccord Genuity Corp.

The authoring analysts who are responsible for the preparation of this investment research are employed byCanaccord Genuity Corp. a Canadian broker-dealer with principal offices located in Vancouver, Calgary,Toronto, Montreal, or Canaccord Genuity Inc., a US broker-dealer with principal offices located in Boston,New York, San Francisco and Houston or Canaccord Genuity Limited., a UK broker-dealer with principaloffices located in London and Edinburgh (UK).

In the event that this is compendium investment research (covering six or more relevant issuers), CanaccordGenuity and its affiliated companies may choose to provide specific disclosures of the subject companies byreference, as well as its policies and procedures regarding the dissemination of investment research. Toaccess this material or for more information, please send a request to Canaccord Genuity Research, Attn:


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Disclosures, P.O. Box 10337 Pacific Centre, 2200-609 Granville Street, Vancouver, BC, Canada V7Y 1H2 [email protected].

The authoring analysts who are responsible for the preparation of this investment research have received (orwill receive) compensation based upon (among other factors) the Corporate Finance/Investment Bankingrevenues and general profits of Canaccord Genuity. However, such authoring analysts have not received, andwill not receive, compensation that is directly based upon or linked to one or more specific CorporateFinance/Investment Banking activities, or to recommendations contained in the investment research.

Canaccord Genuity and its affiliated companies may have a Corporate Finance/Investment Banking or otherrelationship with the company that is the subject of this investment research and may trade in any of thedesignated investments mentioned herein either for their own account or the accounts of their customers, ingood faith or in the normal course of market making. Accordingly, Canaccord Genuity or their affiliatedcompanies, principals or employees (other than the authoring analyst(s) who prepared this investmentresearch) may at any time have a long or short position in any such designated investments, relateddesignated investments or in options, futures or other derivative instruments based thereon.

Some regulators require that a firm must establish, implement and make available a policy for managingconflicts of interest arising as a result of publication or distribution of investment research. This investmentresearch has been prepared in accordance with Canaccord Genuitys policy on managing conflicts of interest,and information barriers or firewalls have been used where appropriate. Canaccord Genuitys policy isavailable upon request.

The information contained in this investment research has been compiled by Canaccord Genuity from sourcesbelieved to be reliable, but (with the exception of the information about Canaccord Genuity) no representation

or warranty, express or implied, is made by Canaccord Genuity, its affiliated companies or any other personas to its fairness, accuracy, completeness or correctness. Canaccord Genuity has not independently verifiedthe facts, assumptions, and estimates contained herein. All estimates, opinions and other informationcontained in this investment research constitute Canaccord Genuitys judgement as of the date of thisinvestment research, are subject to change without notice and are provided in good faith but without legalresponsibility or liability.Canaccord Genuitys salespeople, traders, and other professionals may provide oral or written marketcommentary or trading strategies to our clients and our proprietary trading desk that reflect opinions that arecontrary to the opinions expressed in this investment research. Canaccord Genuitys affiliates, principaltrading desk, and investing businesses may make investment decisions that are inconsistent with therecommendations or views expressed in this investment research.

This investment research is provided for information purposes only and does not constitute an offer orsolicitation to buy or sell any designated investments discussed herein in any jurisdiction where such offer orsolicitation would be prohibited. As a result, the designated investments discussed in this investmentresearch may not be eligible for sale in some jurisdictions. This investment research is not, and under nocircumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction

by any person or company that is not legally permitted to carry on the business of a securities broker ordealer in that jurisdiction. This material is prepared for general circulation to clients and does not haveregard to the investment objectives, financial situation or particular needs of any particular person. Investorsshould obtain advice based on their own individual circumstances before making an investment decision. Tothe fullest extent permitted by law, none of Canaccord Genuity, its affiliated companies or any other personaccepts any liability whatsoever for any direct or consequential loss arising from or relating to any use of theinformation contained in this investment research.

For Canadian Residents: This Investment Research has been approved by Canaccord Genuity Corp., which accepts sole responsibilityfor this Investment Research and its dissemination in Canada. Canadian clients wishing to effect transactionsin any Designated Investment discussed should do so through a qualified salesperson of Canaccord GenuityCorp. in their particular jurisdiction.

For United Kingdom

Residents:

This investment research is distributed in the United Kingdom, as third party research by Canaccord GenuityLimited, which is authorized and regulated by the Financial Services Authority. This research is fordistribution only to persons who are Eligible Counterparties or Professional Clients only and is exempt fromthe general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication ofinvitations or inducements to engage in investment activity on the grounds that it is being distributed in theUnited Kingdom only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2)(High Net Worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000(Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly orindirectly, to any other class of persons. This material is not for distribution in the United Kingdom to retailclients, as defined under the rules of the Financial Services Authority.

For United States

Residents:

Canaccord Genuity Inc., a US registered broker-dealer, accepts responsibility for this Investment Researchand its dissemination in the United States. This Investment Research is intended for distribution in the UnitedStates only to certain US institutional investors. US clients wishing to effect transactions in any Designated


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Investment discussed should do so through a qualified salesperson of Canaccord Genuity Inc. Analyst(s)preparing this report that are not employed by Canaccord Genuity Inc are resident outside the United Statesand are not associated persons or employees of any US regulated broker-dealer. Such analyst(s) may not besubject to Rule 2711 restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst account.

For European Residents: If this Investment Research is intended for disclosure in any jurisdiction other than the United Kingdom, theUS or Canada, then the relevant rules and regulatory requirements of that jurisdiction will apply.

Additional information is available on request.Additional information is available on request.Additional information is available on request.Additional information is available on request.

Copyright Canaccord Genuity Corp. 2011. Member IIROC/Canadian Investor Protection FundCopyright Canaccord Genuity Limited 2011. Member LSE, authorized and regulated by the FinancialServices Authority.Copyright Canaccord Genuity Inc. 2011. Member FINRA/SIPC

All rights reserved. All material presented in this document, unless specifically indicated otherwise, is undercopyright to Canaccord Genuity Corp., Canaccord Genuity Limited, and Canaccord Genuity Inc. None of thematerial, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to anyother party, without the prior express written permission of the entities listed above.

cen dl110309 - a win and a win

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