CA - Logan Energy Corp.: Good Operations Bad Price

2023-10-16 12:01:25 ET

Summary

• Logan Energy Corp. is an independent E&P company based in Alberta, Canada, with a market cap of $529.8mm and no reported debt or cash.
• Logan's Montney assets are well positioned for pipeline access and potential access to LNG Canada's LNG export terminal.
• Logan Energy has drilled and brought on stream 5 of the 7 targeted wells and will be making heavy capital investments in 2025-2027.

All figures in CAD$ unless otherwise stated.

(Editor's Note: Logan's financial reports can be accessed via the Sedar network - Logan Energy Corp ).

Logan Energy Corp. ( LGN:CA ) is an Alberta, Canada-based E&P company. Logan Energy was incorporated on March 10, 2023, and spun out of Spartan Delta Corp. ( SDE:CA ), a $700mm market cap firm based in Calgary, Canada on June 20, 2023, and became fully independent of Spartan on July 6, 2023. Logan sports a $529.8mm market cap with no debt or cash on the balance sheet for an FY23 valuation of 67.48x EV/EBITDA. Based on their early-stage development and the necessity to raise cash for future development in FY25, I provide LGN shares a SELL rating for a price target of $0.35/share for a 33x EV/EBITDA multiple.

Operations

Specific to the spin-off, the assets carved out from Spartan were the Montney assets in Alberta, the same region Hammerhead Energy ( HHRS ), another recent IPO, operates in. Through the IPO, Logan Energy raised equity financing through a private placement valued at $48.5mm in addition to an issuance of 64.3mm units and 74.3mm common shares. Each unit was comprised of one share plus one warrant with a 5-year duration to purchase one share priced at $0.35. As of August 2023, Logan has raised $48.5mm (~25% of equity outstanding) from the private placement, $53.1mm on the exercise of 151.7mm Transaction Warrants, and enacted a $15mm senior secured revolver with the National Bank of Canada.

Upon this process, the initial outlay for FY23 was to drill the first of 7 wells in the Simonette region with an additional 3 wells in Simonette, 3 wells in Pouce Coupe, and 1 well in Flatrock in 2h23.CAPEX for 2h23 was estimated to be $75mm with $18mm to be allocated for land, seismic, infrastructure, and contingency. Management believes this will bring production to reach 7,000boe/day for the month of December 2023 with an average volume of 5,000boe/day for all of 2h23, equating to $8mm in adjusted fund flows.

As of October 2023, Logan has drilled, completed, and brought on stream 5 of the 7 targeted wells. There may be some headwinds in the Flatrock region as D&C is contingent on land continuation requirements.

One major advantage Logan has in the region is the existing infrastructure and accessibility to pipelines. KAPS pipeline was recently completed with 350,000 bbl/day capacity of natural gas liquids. Enbridge runs their BC Pipeline ( ENB ), a 3.6bcf/day natural gas pipeline near the BC-Alberta border. Tidewater Midstream ( OTCPK:TWMIF ) operates the Pipestone gas processing plant in the Montney area with a capacity of approximately 100mmcf/day. The Trans Mountain Pipeline is currently under construction and pending last-minute route disputes, should be completed by q1'24.

TransCanada also operates their Prince Rupert Gas Transmission pipeline ( TRP ) that transports gas from the Montney region to an LNG terminal in Port Edward. This terminal, as of June 2023, is 85% completed with a capacity of 14mtpa and is expected to double in capacity through phase II of the build-out.

Financials & Valuation

Logan Energy generated CAD12.56mm in q2'23. June's production consisted of 4,500boe/day, 24% of which were liquids. Based on management's production forecast and pricing figures based on forward pricing estimates, Logan Energy should produce somewhere in the ballpark of CAD$60mm for FY23.

Based on their q2'23 results and holding all else equal, we can assume a 13% EBITDA margin for CAD$7,851,000. Logan Energy does not currently hold any cash nor debt on the balance sheet. Logan does have access to a CAD$15mm revolver to finance future operations. According to their investor presentation, Logan will be heavily investing in CAPEX between 2025-2027. With their current cash generation from operations and the ability to draw from their revolver, Logan should be able to remain solvent until further financing is incurred.

Based on their current production volumes and my FY23 EBITDA estimate, LGN shares are currently trading at 93.72x EV/EBITDA. Given their estimated growth to 7,000boe/day for FY24 beginning in December 2023, cash generated should remain relatively flat as more operating expenses are incurred to support operations. Given their large capital investment outlay beginning in FY25, Logan may need to incur a large amount of financing capital, whether through debt or equity. Considering this outlook and valuation, I provide LGN shares a SELL rating with a price target of $0.35/share for a forward EV/EBITDA multiple of 33x.

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