IPOOF - InPlay Oil (IPOOF)(IPO:CA) - Production rates blowing through expectations
Management indicates 2021-2Q production could be 5,325 BOE/d. Such a level represents a 7% increase over 2021-1Q production and a 70% increase over 2020-2Q production. Our models assume production of 5,167 BOE/d. Management reiterated annual guidance of 5,100-5,400 BOE/d but indicated it currently expects to be at the upper end of the range and that it would reevaluate guidance when it reports 2021-2Q results on August 11th. Our models assume 5,360 BOE/d and are subject to upward revision if management raises guidance as we expect.The jump in production combined with higher prices is about to make cash flow explode. Management anticipates record Adjusted Funds Flow (AFF) in 2021. InPlay reported $27 million in AFF in 2018. Surpassing that amount would blow through the $21.3 million estimate currently being indicated in our models. Management plans to use cash flow to pay down debt to a level of 1.0 times EBITDA which could mean paying down as much as $20 million of its recently extended credit line, well above the $5 million reduction we had assumed.Where is the strong production numbers coming from? The company brought on 3 wells in 2020-4Q and 3 more in 2021-1Q. The last three wells were 1.5 mile wells drilled in step-out property acquired in 2020. Management suggested the well results would be favorable in a June 15th management interview on Channelchek (https://www.channelchek.com/channelcast-detail/235). Channelchek will be hosting a non deal roadshow for IPOOF on July 8th. Management gave individual well production rates for these three wells due to their strong flow rates, breaking with traditional reporting practice. These wells have a pay back period of under six months at current oil prices. As a result, the company is redirecting capital toward the newly acquired Pembina propertyWe are reiterating our OUTPERFORM rating at prices below our price target of $1.50 ($2.00 for IPA.to). Results are surpassing our expectations and we expect to revise our models upward after 2021-2Q results are released if management raises guidance as expected. We are raising our fundamental rating to 4.0 from 3.0 to reflect the improved health of the energy industry due to higher energy prices. Read More >>