Trilogy Energy (TSX: TET) is a small-cap producer, committed to building value through high quality oil and gas properties in Alberta's Deep Basin. Since 2010, its annual production has grown organically by more than 69%. As a matter of fact, production increased from 19,780 barrels of oil equivalent per day in 2009 to 33,510 in 2012.
Source: Trilogy's Latest Corporate Presentation, June 2013
Promising plays in the Deep Basin
Trilogy has 626,748 in total net acres, as of the end of last year. 64% of this total is undeveloped. Moreover, the producer acquired an additional 7,275 net acres during the second quarter of 2013, for total expenditures of $0.3 million. Trilogy's undeveloped acreage has been independently evaluated at $294.8 million.
The Kaybob area accounted for approximately 95% of Trilogy's production, notably in the Duvernay and Montney formations, and 94% of its capital expenditures in 2012. Trilogy's large portfolio of tight oil and gas assets provides an opportunity to grow its annual production and replace produced reserves on economic plays that have a low risk profile. Trilogy produced 31,743 Boe/d last year, compared to 26,479 Boe/d in 2011.
Trilogy estimated for its 40 net sections in the Montney Formation, a potential average of 10 million barrels of discovered oil initially in place (DOIIP) per section. According to the company, with a recovery factor of 20% to 25%, it would recover between 80-100 Mmbbls with a reserve life index of ten years, assuming an annual production of approximately 8 Mmbbls, or 22,000 Bbls/d. The total 2P reserve has been estimated at 21.5 Mmboe. Last year's capex totaled $325 million for Kaybob. Trilogy allocated $159 million in 2013 to grow its production to an estimated 15,000Boe/d. In the first quarter of this year, its operating netback averaged $48.60/Boe, thereby generating approximately $329 million in cash flow annually.
The Grande Prairie area accounted for approximately 5% of Trilogy's production and 6% of total capex or $21 million last year. For 2013, approximately 7% of the capex has been allowed to this property. Production rose from 1,534 Boe/d in 2011 to 1,767 Boe/d of last year. In addition, it has budgeted $25 million during this year to further develop new oil plays.
With substantial drop in natural gas prices during Q1 of 2012, Trilogy reduced its drilling program in its liquids-rich gas Presley asset in the Montney Formation. $35 million was reallocated for the Kaybob pool. Production averaged approximately 9,011 Boe/d for 2012. Trilogy has allocated $50 million for this year's drilling program. The company has estimated the potential reserves at more than 500 billion cubic feet and 15 Mmbbls of NGLs. Thus, it estimated that over a 10-year reserve life index, production would reach approximately 136 million cubic feet per day of gas, 4.1 Mbbls/d NGLs, and 26,745 Boe/d of oil.
The competition
Among its peers, Peyto Exploration & Development (PEY 1.86%) reported cash netback of $20.82/Boe, Delphi Energy (DEE) declared $12.11/Boe, Baytex (BTE 0.19%) realized $25.76/Boe and Bonavista Energy (BNP) reported $19.49/Boe. Trilogy realized stronger cash netback than any of the peers above. The average netback of the peer group totaled $19.55/Boe while Trilogy reported $29.81/Boe, significantly more profitable than its peer group.
The total debt of the company totaled $694.79 million and its long-term debt to equity ratio is currently at 137.81, very much higher that its industry's average of 72.76. I find its ratio too high to give the flexibility needed to operate efficiently. The high level of debt can be explained by the substantial amount that the company injected in the last three years for the development of some of its most promising assets.
The following chart shows a comparison of the enterprise value/EBITDA of Trilogy and its peer group.
Therefore, Trilogy's valuation is way above the market valuation. It trades at a premium compared to the aforementioned peers except for Peyto from which Trilogy trades at a discount. The EV/EBITDA multiple for its peer group has an average of 27.7x, suggesting that Trilogy has a substantial long-term growth compared to them.
Future outlook
Trilogy's annual guidance for 2013, according to its Q2 of 2013 results is estimated to achieve an average production of 37,000-39,000 Boe/d weighting 45% liquids, realize an average operating cost of $8.00-$9.00/Boe while allocating capex of about $350 million.
2P crude oil reserves have increased 28% from 15,830 Mbbls in 2011 to 20,332 Mbbls for 2012. NGLs increased 23% from 12,292 Mbbls in 2011 to 15,091 Mbbls for 2012. Trilogy's 2P natural gas reserves have increased 2%, from 362.7Bcf in 2011 to 369.2Bcf for 2012. Furthermore, total 2P reserves have been estimated at 96.96 Mmboe for 2012. These reserves' value at NPV10 were estimated at $1.37 billion for 2012.
Bottom line
As of August 31, 2013, the consensus forecast among 17 polled investment analysts covering Trilogy advised that the company will outperform the market. This was the forecast until the sentiment of investment analysts improved on December 14, 2011, advising investors to hold their position in the company.
The stock has a 50-day moving average of $31.42 and a 200-day moving average of $29.60 while it is currently trading below at $29.34. In conclusion, Trilogy has a large prospect inventory in several formations of the Deep Basin with 2P reserves estimated at 96.96 Mmboe with $1.37 billion in NPV. Going forward, it will need to reduce its total debt to provide more flexibility and operate more efficiently.
