InPlay Oil (IPOOF) Update - Nov 28

[dan_s]

I have updated my forecast/valuation model based on the notes that I took at today's luncheon. My current valuation is $7.84Cdn per share that equates to $5.80US. My updated forecast model has been posted to the EPG website.

Eight EPG members attended the small group luncheon hosted by InPlay Oil in Houston today. The combined ownership of InPlay stock was over 400,000 shares and all of us have held the stock for several years.

> The CEO, Doug Bartole gave an update on where InPlay is today and his outlook for 2024 and 2025.
> Q2 shut-ins due to the wildfires in Western Canada all came back online by mid-Q3 with no damage to the wells.
> 3rd party gas processing facilities issues that contributed to lower than expected production in Q3 have all been resolved.
> Q4 production should be up more than 800 Boepd quarter-over-quarter with most of the production increase being crude oil that sold for more than $100Cdn per barrel.
> Full year 2023 production will be near the low end of InPlay's full year guidance of 9,100 to 9,500 Boepd, but Q4 revenues will be much higher because of the big increase in crude oil production.
> 2023 exit rate s/b ~10,000 Boepd (~45% crude oil and ~15% NGLs). Natural gas prices have improved a bit.

> Balance Sheet is now in great shape with only bank debt of $40.8Cdn million drawn on their $110Cdn million revolver.
> Free cash flow in Q4 (~$10Cdn million) should push Net Debt/EBITDA down to ~0.2X, which is super low for a Canadian Junior.
> IPO.TO trading at $2.36Cdn today, which is less than 2.3 X operating cash flow per share for 2023. < InPlay's size and Running Room deserves a much higher multiple.
> PV10 Net Asset Value based only on the Company's Total Proved reserves is $7.20Cdn < Based on their 12-31-2022 3rd party reserves report. InPlay's 2023 drilling program should increase Proved Reserves YOY.
> InPlay's leasehold at their core areas of Pembina and Willesden Green is all held-by-production, which makes them more of a takeover target.
> Running Room: They have 153 net HZ drilling locations at Pembina and another 188 net HZ drilling locations at Willesden Green.

> Production Guidance for 2024 is 10,250 to 11,250 Boepd. < My forecast model for 2024 was based on 10,700 Boepd (lucky guess).
> 2024 Drilling Program will be focused primarily on oil prone areas in Willesden Green in 1H 2024 with one rig moving to a more natural gas prone area in Pembina in 2H 2024, assuming natural gas prices move higher.
> CapEx in 2024 should be a bit lower next year (~$80Cdn million) because they spent more money on production facilities this year.
> Free Cash Flow should be $50 to $70 million in 2024. At the high end they might increase the dividend.

Current monthly dividends are $0.015/share. $0.18/year is annual yield of 7.6%. < Nice to be paid while we wait for this stock to get valued correctly by this market.

InPlay has a lot of high-quality "Running Room" that can be fully developed with operating cash flow if their oil price stays over $75Cdn/bbl (their realized oil price in Q3 was $105.36Cdn/bbl)

[cmm3rd]

Thanks for posting the results of the meeting with Doug Bartole. Very helpful and reassuring.

"> Balance Sheet is now in great shape with only bank debt of $40.8Cdn million drawn on their $110Cdn million revolver.
> Free cash flow in Q4 (~$10Cdn million) should push Net Debt/EBITDA down to ~0.2X, which is super low for a Canadian Junior."

What is Doug's plan re further debt reduction? Does your second sentence quoted above imply that some of the ~$10 mil Cdn FCF in Q4 will be used to further reduce debt? How much? What about 2024? Carrying the debt might be thought wise internally, but some market participants might think that debt, especially for a small producer, in the current interest rate environment, with oil demand/pricing uncertainty globally, affects risk and therefore affects market's valuation of the shares.

"Free Cash Flow should be $50 to $70 million in 2024. At the high end they might increase the dividend."

Did Doug say they would consider increasing the dividend at the high end of the FCF projection, or is that your surmise?

Thanks again.

[dan_s]

Doug is definitely not going to go "Drill Baby Drill" on us. InPlay has over 400 low-risk / high-return development drilling locations that payout in less than a year at $75 WTI, but he's only going to drill about 20 per year. All of the Company's leasehold at Pembina and Willesden Green is held-by-production. The East Basin Duverney Shale leasehold has many more years before the leases expire, so InPlay is unlikely to drill wells there in 2024 or 2025 unless oil prices go a lot higher.

InPlay will pay down a bit more debt, but InPlay has no debt issue and keeping some debt keeps the bankers happy. InPlay may need them in the future for a significant accretive acquisition.

Doug would not commit to dividend increases, but I think he'd rather keep the monthly base dividends flat and pay a "Special dividend" at year end like Hemisphere is doing with extra free cashflow.

IMO InPlay is now a Screaming Takeover Target. He did say that his BOD would consider an offer of $5.00Cdn/share. Doug's team has sold two previous companies for big gains.

[ChuckGeb]

I attended the IPOOF dinner in Monday evening group. I asked Doug about takeover potential and he responded that they need to get to 20,000 boepd to get a decent offer and it was apparent his plans were to do that thru opportunistic acquisitions. It doesn’t seem that debt pay down or increased dividend at depressed share value is likely.

I also asked him about the CPG broke deal on their $500k stock offering which I believe is a significant reflection of lack of institutional and general interest in Canadian oils. I think Eric Nutall came to the rescue of the underwriting banks and took a significant part of their shares at a reduced price.the message to me is that a significant paradigm shift needs to occur before any Canadian stocks will trade at a higher multiple.

Thus the clear signal is to have a long view with companies that have a good balance sheet, generating FCF, paying a decent dividend and/or buying back stock, and are making strategic acquisitions that fill in their holdings.

In my view these stocks including IPOOF need to be viewed as long term holdings.

[dan_s]

I agree 100%.
Eventually, we will see "multiple expansion" for these high-quality companies, but EVENTUALLY can take longer than you think.

I am loading up on companies that pay dividends. InPlay is definitely a "Keeper".

Come to our luncheon on December 8, hosted by Hemisphere Energy.

[ChuckGeb]

Additionally the new G & R piece reflects on what A I believe is an all but certain paradigm shift and bull market in all commodities including oil, gas, gold and silver, uranium, and farm land. As always it is extremely difficult to pick exactly when the shift will happen but things seem to be lining up for it. Sooner or later folks will realize there is very little upside in the Magnificent 7 as they are beyond fully priced for the next 10 years +/- of growth.

[dan_s]

I have updated my forecast/valuation model for InPlay and I have finished my review of the updated profile on the company that we will email to all EPG members tomorrow.

I have lowered the oil prices in my forecast model for Q4 and 2024. InPlay's realized oil price was $105.36Cdn/bbl in the 3rd quarter and their realized oil price in the 4th quarter should be $95/bbl. < Their realized oil price in October was ~$110Cdn/bbl.

My current stock valuation declines by $0.45US to $5.35US per share.

At the time of this post, IPO was trading at $2.25, which is less than 2X my 2024 operating cash flow per share forecast of $1.32Cdn/share.
> Dividend Yield is ~8% and they can maintain their current base dividend as long as WTI stays over $55US/bbl.

Thanks to improvements made to some gas processing facilities that take InPlay's raw gas production, the Company is now recovering more high-value NGLs. Gross revenues should be up more than $3Cdn million quarter-over-quarter due to the increase in liquids production. Most of their 2H 2023 capex was spent in the 3rd quarter, so InPlay's free cash flow will be much higher in Q4. The Company's balance sheet will be in great shape at year-end.