InPlay Oil (IPOOF) Valuation Update - Aug 11

[dan_s]

At the time of this post IPO.TO was trading at $3.72Cdn, which compares to First Call's Price Target of $6.90Cdn
IPOOF was trading at $2.93US.

I have updated my forecast model for InPlay's strong Q2 results and updated production guidance. At this point in the year, I have a HIGH level of confidence in my forecast model, primarily because we are now past the "Spring Breakup" weather in Alberta, which can have a significant impact on production and operating expenses.
InPlay expects to ramp up production during Q3 and Q4, completing several high-rate extended reach horizontal wells. From actual production of 9,063 Boepd in Q2, I now expect InPlay to ramp up to an exit rate of ~10,500 Boepd by December, 2022.
It is also important to my valuation that each quarter, InPlay is producing more unhedged oil and gas. For July thru November, InPlay only has 1,400 bpd of crude oil hedged based on WTI prices with collars that have $100US/bbl ceilings, so basically none of their oil sales will be impacted by hedges unless WTI goes back over $100/bbl. Their natural gas hedges have a small impact on my valuation. None of their NGLs are hedged and their realized NGL price was $59.73Cdn/bbl in Q2, more than $10Cdn/bbl over my forecast.

My valuation of IPOOF increases by $0.40US to $7.65US per share. This valuation is based on 6X annualized operating cash flow per share, which still includes 2021 operating CFPS of $0.51Cdn. My forecasts are OCFPS of $1.81Cdn in 2022 and $2.24Cdn in 2023.

Basis for increased valuation:
> InPlay's balance sheet is now in GREAT SHAPE, with NO DEBT PROBLEMS
> The Company has several hundred low-risk / high-return horizontal drilling locations that at current oil prices payout in 4-6 months.
> Less than 45% of their operating cash flow ("Adjusted Funds Flow") covers 100% of this year's drilling program.
> I like InPlay's production mix of 43% crude oil, 42% natural gas and 15% NGLs. High ngas and NGL prices have pushed revenues much higher than my original forecast for InPlay.
> With lots of FCF and ample liquidity, InPlay is well-positioned to bolt on more accretive acquisitions in their core areas.
> There is now a good chance that InPlay will start paying dividends later this year.
> There is nothing in my valuation for the HUGE upside InPlay has in the East Basin Duvernay Shale play (see slide 20 of their presentation).

My updated forecast model for InPlay has been posted to the EPG website. Focus on Row 48, Operating Cash Flow.