Is Inplay Oil (Can) an undervalued oil and gas company?

[Petroleum economist]

Summary
Inplay Oil is a small Canadian oil and gas company, operating in Cardium and Belly River in Alberta. Market value is $ 212 M. Inplay has ample reserves, a growing production, a very solid balance sheet, robust profitability and good shareholder returns. Inplay is undervalued

Reserves
• Late 2023 proven reserves were 45.9 M BoE.
• Reserves are equivalent to an ample 13.9 years of 2024 production, well above industry average of 9.5-10 years.
• Inplay does not publicize data which allow an easy calculation of the RRR. Based on the increases of reserves over time, excluding known acquisitions, it is deduced that the RRR’s are well above 1.0. This means Inplay is more than replacing its annual production.
• The reserves and the RRR’s allow production to grow over time.

Production
• Q1 production (8.6 K BoE/d) was -10.3% below Q4 2023 (9.6 K BoE/d). This was due to winter weather/3rd party downtime (-0.5 K BoE/d) and three out of the five wells drilled in Q1 coming on line only in late March/April.
• I expect Q2 production to increase to 9.2-9.4 K BoE/d,
• With 60% of the 2024 wells drilled in H2, production can increase in Q3/Q4. The H2 wells include three prolific wells in the Cardium in September.
• Production outlook for 2024 is 9.0-9.5 K BoE/d. This is 2.5% above 2023 (9.0 K BoE/d).
• I expect production in 2024 to be towards the upper end of the guidance.
• Production in 2025 and onwards can grow with 4-5%/year to 12-13 K BoE/d over time
• Fluids are mostly liquids (oil 40%, NGL 17%, gas 43%).
• Fluid composition (40/17/43) is not full aligned with reserves (45/17/35), indicating that the production over time will become a bit gassier.

Balance sheet
• Inplay has a solid balance sheet.
• Late 2023 solvency was a healthy 62.2%.
• Late 2023 debt was C$ 47 M. 2023 debt/EBITDA ratio was a low 47/87 = 0.54.
• Inplay spend 40% of the 2024 capex (C$ 25.5 M) in Q1. This resulted in a negative FCF. Consequently, solvency in Q1 dropped to 59.7% and debt increased to C$ 51 M.
• In the rest of 2024 capex spent will be lower. Thus, debt should reduce and solvency will increase.
• I expect a low debt/EBITDA ratio for 2024. Inplay guidance is 0.4-0.5.
• Solvency late 2024 should be a very solid 63-64%.
• The balance sheet allows generous shareholder returns.

Profitability
• Inplay sells its oil/NGL at a large discount (-US$ 19/bbl) to WTI. With the start-up of the Trans Mountain pipeline expansion the discount in H2 2024 should reduce. Inplay expects a US$ 5/bbl improvement.
• Realized gas prices are -US$ 0.44/MM Btu below Henry Hub.
• Inplay pays a relatively limited 11.3% royalties over its oil and gas revenues.
• Unit costs (incl depreciation, general /administration, and interest) are a medium/low US$ 28.85/BoE in 2024.
• Q1 net profit was C$ 1.7 M (eps C$ 0.02) due to the low production.
• With WTI at $ 80-85/bbl, I expect a 2024 net profit of C$ 24-30 M (eps = C$ 0.28-0.34, PE is a medium low 6.8-8.3).
• In 2025 with the Trans Mountain pipeline benefits applied over the whole year and with higher production, the eps can increase to C$ 0.48-0.58 (PE 3.9-4.7)
• In 2026 with growing production, eps can increase to C$ 0.56-0.67 (PE 3.5-4.1)
• If WTI dips to $ 60/bbl, Inplay still will report a net profit. Inplay is robust under medium/low oil prices.
• Inplay is very profitability

Shareholder returns
• Inplay intends to return 87% of the FCF to shareholders.
• Inplay pays a fixed monthly dividend of C$ 0.015, for an annual dividend of C$ 0.18.
• Inplay does not buy back shares.
• The shareholder returns in 2024 are equivalent to a good yield of 7.8%
• Dividends in 2025 and onwards can potentially be increased.

Conclusions
Inplay is an attractive investment with ample reserves, a growing production, a solid balance sheet, a good profitability and good shareholder returns.

In my oil and gas company ranking Inplay sits in a high 5th position, indicating it is a very attractive investment compared to its peers. Inplay is undervalued.