IONA ENERGY INC. – BUY Solution Presented to

Bill Newman, CFA 403.750.1297
bnewman@mackieresearch.com
Valentino Pintea, Associate 403.750.7406
vpintea@mackieresearch.com
D e ce m ber 1 8 , 2 0 1 4
IONA ENERGY INC. – BUY
INA - TSXV
$0.075
TARGET:
(from $0.85)
$0.40
PROJ. RETURN:
433%
VALUATION:
0.25x NAVPS
Share Data
Basic Shares O/S (mm):
Fully Diluted O/S (mm):
Market Cap ($mm):
Enterprise Value ($mm):
Net Debt (W.C.) ($mm)*:
Next Reporting Date
*As at Q3, 2014
Solution Presented to Prevent Covenant Breach
DETAILS – Corporate Update
As at September 30, 2014, Iona Energy Inc. (“INA”) had US$96.7 million of cash (including
restricted and unrestricted) and was in full compliance with its bond covenants. Today, INA
cautioned that it could breach its bonds covenants at some point within the next 12
months due to the following factors:
370.6
390.9
27.8
228.2
200.4
April 2015
$0.80
$0.40
$0.20
Apr-14
Aug-14
Steep decline in international crude oil prices
•
Continuous interruptions of production at Huntington field
•
Delaying Orlando first oil production to 2016 from 2015
Management has suggested refinancing the bonds in combination with an acquisition as
one solution to prevent a default. The company has attempted to reduce costs and
reposition capital for Orlando’s development in an effort to improve its financial situation
since September 1, 2014. Currently the company is in discussions with its bondholders to
increase its financial flexibility.
$0.60
Jan-14
•
IMPACT – Negative. Increased Risk Factors In Stock
$0.00
Dec-14
We are confident management will be able to negotiate and refinance its bonds however it
could be some time before the company is able to implement an acquisition and
production diversification strategy in today’s lower oil price environment and thereby
this introduces more risk into the stock.
Corporate Profile
Iona Energy Inc. is an exploration and
production company with operations
exclusively focused in the UK North Sea.
Management and directors have extensive
international oil and gas experience, much
of which has been focused on North Sea
exploration
ACTION – BUY. Lowering Target
Although INA continues to seek diversifying production through new acquisitions,
today’s low oil price environment has made the time-frame for this to occur unknown.
The potential for default also introduces further risk into the stock however this is not to
be confused with liquidity risk as the company has ample cash. We maintain our BUY
recommendation and lower our target price to $0.40 from $0.85 target price, equivalent to
our new 0.25x risked NAV multiple (previously 0.50x) based on a lower oil price
environment and increased risk factors in the stock.
Upcoming Events
- Huntington production ramp up (Dec./
2014)
- Refinancing bonds with an acquisition of a
producing asset (tbd)
- Orlando First Production (late 2016)
FYE Dec 31
2013A
1,448
Q1/14A
Q2/14A
Q3/14A
Q4/14E
3,823
2,514
2,528
878
2014E
2,434
Q1/15E
Q2/15E
Q3/15E
Q4/15E
3,598
3,508
3,420
3,335
2015E
3,465
Oils & Liquids
bbl/d
Natural Gas
mmcf/d
3.3
2.0
1.5
1.2
1.0
1.4
3.4
2.6
2.6
2.5
2.8
Boe/d*
6:1
2,002
4,155
2,759
2,736
1,042
2,674
4,169
3,946
3,848
3,751
3,928
Production Growth
%
69%
91%
90%
92%
82%
90%
86%
89%
89%
89%
88%
Cash Flow
US$mm
31.3
27.1
3.3
(19.3)
(1.9)
17.8
13.8
12.7
12.0
11.4
49.9
Cash Flow/FD Share
$/share
0.09
0.07
0.01
(0.05)
(0.01)
0.05
0.04
0.03
0.03
0.03
0.14
EV/DACF
multiple
3.9x
1.5x
4.6x
na
9.3x
4.5x
2.4x
2.5x
2.7x
3.0x
2.9x
*Includes 2.55% royalty
This report has been created by analysts who are employed by Mackie Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report.
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Intraday RESEARCH ALERT – Quarterly Results – IONA ENERGY INC.
Page 2
BOND COVENANTS
On September 27, 2103, INA issued U$275 million of senior secured bonds with a 9.5% coupon payable
semi-annually. As at September 30, 2014 INA was in compliance with all covenants (Figure 1).
Management has stated there is the potential to breach the bond covenants within the next 12 months due
to falling oil prices, continuous production disruptions at Huntington field and delaying Orlando first oil
production to 2016 from 2015. The company would like to refinance the bonds in combination with an
acquisition as one solution to prevent default on the bonds.
Figure 1: Debt Covenants
Covenant
Liquidity - Cash and cash equivalents of at least $30 million
Capital Employed Ratio - Equity/(Equity + Debt)
Restricted Capital Employed Ratio - Restricted Equity/Restricted Equity + Debt)
Leverage Ratio - Debt/ Trailing 12 months EBITDA
Ratio
> $30 mm
> 40%
> 40%
< 3.0x
Sept 30th
$89.3 mm
48%
48%
2.27x
Source: Company presentation, Mackie Research
Bond Maturities: The bonds mature on September 30, 2018 and will be repaid at 15% of the face value
(US$275 million) every six months with a 25% final payment at maturity. The first repayment is
scheduled for March 2016 (Figure 2).
Figure 2: Bond Repayment Schedule
Payment Date
March 2016
September 2016
March 2017
September 2017
March 2018
September 2018
Total
Source: Company presentation, Mackie Research
$
$
$
$
$
$
$
Intallment
41,250,000
41,250,000
41,250,000
41,250,000
41,250,000
68,750,000
275,000,000
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Intraday RESEARCH ALERT – Quarterly Results – IONA ENERGY INC.
Page 3
Figure 3: Detailed History and Forecast
Iona Energy Inc.
INA
Share
Basic Shares (mm):
Diluted Shares (mm):
27.8
370.6
Fully Diluted (mm):
390.9
Production
Oil & Liquids
bbl/d
Natural Gas
mmcf/d
6:1
Boe/d 1
Percentage Oil
%
Cash Flow & Earnings *
Cash Flow
US$ m m
Cash Flow /FD Share
$/share
Earnings/FD Share
$/share
$/Barrel of Oil Equivalent (US$) *
Revenue
$/boe
Operating Costs
$/boe
Cash Flow
$/boe
Valuation Metrics (C$)
FD Cash Flow Multiple
EV/DACF Multiple
EV/Production
C$/mboe/d
EV/boe reserves
C$/boe
Com m odity Price
Brent
US$/bbl
Corporate Oil & Liquids*
US$/bbl
Corporate Natural Gas*
US$/mmbtu
Exchange Rate
US$ per C$
Capex and Capital Structure
Capex *
US$ mm
Capex/Cash Flow
%
Weighted Average Basic
mm
Dilutive Shares
mm
Market Cap
C$ mm
Enterprise Value
C$ mm
Year-end Net Debt (WC)
C$ mm
Net Debt/Cash Flow
NAV, Reseves and Concessions
Market Value
Market Cap. ($ mm): $
27.8
Enterprise Value ($ mm): $
228.2
Net Debt (W.C) ($ mm): $
Target Price
Target Price:
$0.40
Return:
433%
52 Week Low :
Risked NAV:
0.25x
$0.06
2012A
1.9
313
0%
2012A
($6.6)
($0.0)
($0.0)
2012A
54.09
22.23
na
2012A
na
730
6.34
2012A
112.73
na
9.05
1.00
2013A
1,448
3.3
2,002
72%
2013A
$31.3
$0.09
$0.08
2013A
100.70
25.85
48.15
2013A
0.9x
3.9x
114
6.71
2013A
108.56
108.35
10.07
1.00
Q1/14A
3,823
2.0
4,155
92%
Q1/14A
$27.1
$0.07
($0.00)
Q1/14A
110.13
20.11
83.68
Q1/14A
0.2x
1.5x
55
Q2/14A
2,514
1.5
2,759
91%
Q2/14A
$3.3
$0.01
($0.08)
Q2/14A
124.75
51.11
15.40
Q2/14A
1.9x
4.6x
83
Q3/14A
2,528
1.2
2,736
92%
Q3/14A
($19.3)
($0.05)
($0.12)
Q3/14A
103.16
38.51
(88.77)
Q3/14A
na
na
83
Q4/14E
878
1.0
1,042
84%
Q4/14E
($1.9)
($0.01)
($0.02)
Q4/14E
71.40
39.00
(22.50)
Q4/14E
na
9.3x
219
2014E
2,434
1.4
2,674
91%
2014E
$17.8
$0.05
($0.21)
2014E
107.91
34.63
21.06
2014E
1.4x
4.5x
85
2015E
3,465
2.8
3,928
88%
2015E
$49.9
$0.14
($0.04)
2015E
72.85
26.99
40.63
2015E
0.5x
2.9x
58
Q1/14A
108.10
107.87
12.04
0.91
Q2/14A
109.76
109.10
7.77
0.92
Q3/14A
103.46
86.20
7.84
0.92
Q4/14E
85.14
75.14
8.98
0.91
2014E
101.62
94.58
9.16
0.91
2015E
85.00
75.00
9.46
0.89
2012A
143.1
na
273.6
279.1
23.9
58.7
34.7
na
2013A
269.8
861%
360.8
363.1
27.5
210.9
183.4
5.9x
Q1/14A
3.2
0.1
366.8
366.8
27.5
220.3
192.7
1.6x
Q2/14A
0.4
0.1
366.8
366.8
27.5
219.7
192.1
13.2x
Q3/14A
6.7
(0.3)
368.1
368.1
27.8
223.9
196.1
-2.3x
Q4/14E
10.0
(5.3)
368.1
368.1
27.8
239.1
211.3
-25.5x
2014E
20.3
114%
367.4
368.1
27.7
238.1
210.4
10.8x
2015E
65.0
130%
366.7
368.1
27.5
259.6
232.1
4.2x
Net Asset Value
Reserves (P + P)*
Net Debt
Other Liabilities
Net Asset Value (Basic)
Dilution
Core NAV/FD Share
Price to core NAV
Risked Exploration (C$)
Risked NAV/FD share (C$)
Price to risked NAV (multiple)
200.4
Stock Price
Close:
$0.08
52 Week High:
$0.68
C$mm
C$/share
772.9
$2.09
200.4
$0.54
0.0
$0.00
572.5
$1.54
0.0
$0.00
572.5
$1.54
0.05x
32.9
$0.09
572.5
$1.54
1.6
0.05x
Reserve Estim ate (Decem ber 31, 2013)
(mboe)
Proven
55%
18,852
Probable
45%
15,128
P+P
33,980
Notes: * INA changed presentation currency to US$ from C$ starting Q4/13
1. Includes 2.55% royalty
Source: Company reports, Mackie Research Capital
Reserve Life Index
Production
2013
2014
25.8
19.3
46.5
34.8
Orlando
West Wick
Kells
Trent & Tyne
Huntington
Estim ated 2P Reserves By Field
mmbbls
bcf
(mboe)
11,530
0.0
11,530
9,710
0.0
9,710
3,150
20.7
6,592
19
21.4
3,590
4,140
2.6
4,580
28,549
44.7
36,002
As of date xxxxxxxxxxxxxxxx
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Intraday RESEARCH ALERT – Quarterly Results – IONA ENERGY INC.
Page 4
RISKS TO TARGET
Funding risk: A portion of Iona’s funding will be derived from cash flow from the Huntington field. Production disruptions or a
sustained low oil prices could limit Iona’s ability to implement its business plan.
Operational risk: Iona’s primary operational risk is the potential for cost overruns and delays associated with the drilling and tie-in of
its development plays.
Default risk: Iona could breach its bond covenants leading to a default due to market and operational factors and if it cannot
renegotiate its bond agreement.
RELEVANT DISCLOSURES APPLICABLE TO: IONA ENERGY INC.
1.
Within the last 3 years, Mackie Research Capital Corporation has managed or co-managed an offering of securities by
the subject issuer.
2.
Within the last 3 years, Mackie Research Capital Corporation has received compensation for investment banking and
related services from the subject issuer.
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and opinions expressed in this research report accurately reflect the analyst’s personal views and (ii) no part of the research analyst’s
compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research
report.
Information about Mackie Research Capital Corporation’s Rating System, the distribution of our research to clients and the percentage of recommendations
which are in each of our rating categories is available on our web site at www.mackieresearch.com.
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