Fear Drives Stock Lower: There appears to some degree of fear in the market that Coastal will miss its production guidance this year. We believe it is pre-mature to definitively pinpoint a miss on guidance based on the first two months of production and with a number of wells and fields yet to come on stream this year. Timing and well performance will ultimately dictate missing, meeting or exceeding guidance.
Swimming in Cash Versus Wading in Cash: To what degree would a 10% miss in offshore Thailand production guidance impact cash flow? We believe it would move the FCF yield from ~10% to ~8% at current prices. We do not believe ultimate full year offshore production in Thailand will materially miss guidance beyond 10%, if it does at all. Even if there are capital program delays resulting in a miss, it likely would not change our overarching investment thesis. There are relatively few E&P companies that have high returns and low costs to offer a FCF yield and still potentially and materially grow the company via exploration.
Viewing the Forest via Metrics: We believe investors who are overly focused on near term production to be missing the bigger picture. We estimate a FD&A cost of ~US$6.80 per boe this year with a recycle ratio of ~5 times, which leads the peer group. These figures are a reflection of the high returns, speed and scalability of Coastal's assets and operations that should drive the stock price higher in the long term. We believe viewing the forest is certainly more useful than getting lost within the trees.
Recommendation: We reiterate our OP rating and TP C$33. Trading at ~0.7x 2P NAV, CEN remains our top pick by a wide margin at current prices. We are revising our 2013/2014 EPS estimates to C$2.02/C$2.07 (from C$2.08/C$2.05) respectively.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
