Lightstream Resources

[Laurin_DE]

just cut and paste the link - should work without problem...
when I cut and paste the article (see below), the graphs/tables don't come up.

cheers - Laurin



Is The 10.7% Dividend Safe For Lightstream Resources? What Is The Downside Risk?

Is The 10.7% Dividend Safe For Lightstream Resources? What Is The Downside Risk?

Oct. 3, 2014 10:46 PM ET | About: Lightstream Resources Ltd. (LSTMF) by: David Braunstein, CFA
Disclosure: The author is long LSTMF. (More...)

Summary
During the last 10 to 40 years of a shale well’s life production in the Bakken declines between 5% to 10% per year.
If the LTS.T stopped all exploration and focused only on paying the existing dividend, how long could the existing dividend be maintained based on 2Q2014 production?
Case I, doomsday scenario, where oil prices and production drop by 10% per year; even with extreme assumptions the dividend is safe.
Case III demonstrates a conservative scenario where prices stay flat for the next 10 years and production drops by 5% per year showing LTS.T should not be below C9.11.
If the Company uses excess funds to successfully grow the company, then LTS.T could trade much higher because 70% to 90% production occurs the first year in shale plays.
This report is about the dividend safety of Lightstream Resources, and about using a NPV (net present value) approach to valuing a company that pays a dividend. NPV can be described as the value in today's dollars of the future dividend stream for a given number of years at today's cost of capital. Cost of capital is the interest rate one uses in the NPV calculation. It is the interest rate the investor can be expected to receive with a comparable alternative investment. For purposes of this analysis I assume one could invest in 10-year, A-rated Corporate bonds and get 3.62%. That is the interest rate I am using as cost of capital because the investor in Lightstream would be giving up the opportunity to earn 3.62% (cost of capital). Lightstream is an interesting subject because it pays 4 cents Canadian per month that adds to C0.48 per year. I will use the C0.48 per year instead of the C0.04 per month to simplify calculations in my analysis.

Lightstream Resources is a Canadian exploration and production company with an over 670,000 acreage position, primarily in the Bakken and Cambian shales with proved developed and proved undeveloped reserves of 179 million barrels of oil equivalent. Current production is about 42,500 per day. The Company has over 1,950 drilling locations representing over 10 years of drilling inventory. Lightstream trades on the Toronto Stock Exchange with the symbol LTS. It also trades in the United States in the over the counter market with the symbol LSTMF.

In the analysis of Bakken production curves one experiences 70% to 90% of primary production the first year and the industry commonly applies a terminal constant decline rate of 5% to 10% per year for the next 10 to 30 years of production. Growth of a fracing company is very tricky. The steep decline curves replacing last years production requires an exponential increase in new wells. Managements that understand this start very slowly.

Investors need to realize that there can be disappointments in future production predictions by frac companies. Those frac companies that return value to shareholders in dividends are the best ones to own even if the shares plummet due to management not meeting expectations. For a frac company the big danger is that management is not diligent with their costs during the exciting initial production coming from new wells. Money must be saved to pay debt holders and shareholders.

Since almost all revenues come from oil and gas production, it is not a stretch to assume that revenue is a function of oil and gas prices and the amount of hydrocarbons produced. One way to test dividend safety is to assume that oil and gas prices decline by 10% per year for the next ten years and that production declines by 10% per year as is common in Bakken shale wells. If we project out the cash flow from existing production given these harsh assumptions then discount the dividends paid from cash flow over ten years we can derive a current value for the stock assuming very harsh assumptions.

Notice that I am not considering the recent asset sales, but only counting revenues as of the second quarter of 2014. The reason is that we do not know what effect the asset sales will have on production until likely the fourth quarter. At that time I will revisit this analysis. I would speculate that the asset sales will have a positive impact on this analysis, but that is for a later time.

The following spreadsheet shows case I, 10% per year decline in prices and a 10% per year decline in production. All fund flow in excess of dividends is plowed back into cash without being reinvested. This is important since the accumulation is saved to repay outstanding debt at year ten. Funds flow is defined as all cash flow less all cash outflows that include salaries, bonuses, operating expenses, debt expenses, taxes and general and administrative expenses. The interest rate used in these calculations is that of a 10 year A rated corporate bond of 3.62%. Starting prices are those achieved during the second quarter of 2014 in the quarterly report. Notice that expenses associated with funds produced are also likely to decline 10% per year. All amounts are in Canadian dollars.

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The net present value after debt repayment of a stream of dividends of C0.48 per share per year for 10 years at 3.62% is C4.15 per share. Notice that the lenders did a good job in testing a worst case scenario as with only existing production all debt can be paid back in year 10 with 18 cents per share of funds left over for the shareholders given draconian assumptions.

Case 2 shows what the NPV would look like using a more favorable decline curve, but still very conservative because it assumes that prices decline by 5% per year. Notice that expenses associated with funds produced are also likely to decline 5% per year.

(click to enlarge)

For Case II the net present value after debt repayment of a stream of dividends of C0.48 per share per year for 10 years at 3.62% is C4.91 per share.

The third case assumes that costs and prices stay flat, but production declines by 5% per year.

(click to enlarge)

Even Case III is very conservative since most people assume that after two years that oil prices will rise because of the steep decline in frac production especially for oil. With flat prices I'm showing that after debt repayment in year 10 the NPV is C9.11 per share.

Conclusion

Lightstream at current prices looks to be very attractive using only current production. It seems that even with draconian assumptions that downside risk is limited. If management can successfully plow excess cash flow into new wells we should see growth from production leading to much higher valuations.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Additional disclosure: The author is long LSTMF and has no plans to sell it in the next 72 hours.

[k1f]

If the current crunch in crude prices produces prices around $80 or less, what happens to Lightstream?
Presumably the div would be cut, freeing up some cash but probably also further crushing share price.
How do you see such oil price scenarios playing out?