UPDATE: Seaport Global Securities Upgrades PetroQuest (PQ) to Buy Following Proposed Exchange Offer
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(Updated - August 26, 2016 9:35 AM EDT)
Seaport Global Securities upgraded PetroQuest (NYSE: PQ) from Accumulate to Buy with a price target of $5. Analyst Mike Kelly characterized its proposed debt swap as a "new lease on life."
"PQ's proposed exchange offer covering its entire $280.3MM of outstanding debt is a point of inflection transaction that has a very high likelihood of coming to fruition given current bondholder support, in our opinion," said Kelly. "We are upgrading PQ to Buy from Accumulate as we now believe near-term balance sheet concerns have been mitigated, which will allow investors to focus on PQ’s emerging ~26K net acre position in the Cotton Valley; a considerably valuable asset in our view. The Cotton Valley is deemed capable of generating 67% IRRs at $3 gas, which positions PQ for considerable growth in FY17 and beyond as it gets back to work."
"Assuming PQ completes eight Cotton Valley wells in FY17 and sticks to its previously announced plans to pull the trigger on its high-impact/ low-cost Thunder Bayou recompletion at the end of FY16 (which could double the well’s current ~11 MMcfepd net rate in exchange for $400K net cost), we estimate PQ could post production growth of 62% by Q4:17 vs. Q4:16 rates, and achieve the feat from within cash flow if management elects to utilize the PIK option on PQ’s new Second Lien Notes (more detail on the new notes below). Looking out to FY20, we estimate PQ can post a 30%+ production growth CAGR on a debt-adjusted basis, while only triggering a modest outspend of ~$70MM. This growth profile results in considerable compression to valuation multiples (projected EV/EBITDA falls from 20.5x in FY16 to 8.2x in FY17 and 3.3x in FY18) and debt metrics (net debt/EBITDA falls from 14.8x in FY16 to 5.9x in FY17 and 2.4x in FY20)," continued the analyst.
Kelly added, "Furthermore, we wouldn’t be surprised to see PQ ink a Cotton Valley JV by year-end, which would likely entail an attractive carry structure that would further enhance valuation, leverage, and debt-adjusted growth metrics. We are increasing our NAV-based price target by $1.00 to $5.00 on increased activity levels, which offset ~20% shareholder dilution associated with the debt exchange."
Shares of PetroQuest closed at $1.76 yesterday.
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