Lightstream: Let's start over

[dan_s]

From k1: The bears are downgrading Lightstream. Here's RBC's take on the prospects:

<<https://rbcnew.bluematrix.com/docs/pdf/ ... f6fe43.pdf?

RBC is grim, but less concerned about fatality than the assessment below, which I posted here earlier today, tho the EP website isn't showing it, so here it is again:

<<Lightstream Resources Ltd. (LTS $1.34) Sector Underperform Target 12 MO $0.25 2015 Capital Program Dividend Reduced; Sustainability Remains a Concern

2015 Budget & Guidance: Lightstream announced a $200 MM capital budget for 2015 and production guidance of 30 MBOE/d to 32 MBOE/d. The production guidance compares to our 2014 exit rate of ~36 MBOE/d, with our revised production estimates representing a ~17% decline YoY (Q4/15E versus Q4/14E). Incorporating a lower capital program (from $300 MM to $200 MM), reduces our 2015E production and cash flow estimates by ~9% (see summary of changes below). The capital program will be weighted ~73% to E&D spending primarily in the Cardium and in SE Saskatchewan, with no operated capital in the Swan Hills given the challenging economics in the play.

Dividend Reduction & Sustainability: The lower capital program is a necessary step, however, given the high debt levels and declining production profile we view the dividend as unsustainable. Lightstream reduced the dividend by 63% (to $0.015 per month), and despite the attractive yield, we believe further reductions will be necessary. Based on our revised estimates at current strip pricing, we forecast rising debt levels with a 2015 D/CF ratio of 7.4 times and total payout of ~171%. Our estimates indicate the company will breach a covenant on its credit facility in H2/15 (see table on

Potential Bakken Disposition: The company announced plans to sell its Bakken unit over the next 12 to 24 months to reduce debt levels. The asset includes production of ~12 MBOE/d (2015E) and has a moderate decline rate, but limited inventory. While there are several possible outcomes in a sales process, we believe there are few logical buyers, and anticipate that a sale would not materially improve the outlook. We provide a summary of a possible sale scenarios in the table on page one on our 2016 estimates.

Recommendation: Lightstream currently trades above our base NAV of $0.25 per share, and at a 2015 EV/DACF multiple of 6.0 times, (2016 EV/DACF multiple of 6.9 times). Given the company’s high debt levels and declining production profile, we believe the dividend needs to be eliminated and improvements on the base assets are necessary to improve the outlook and support the current valuation. We maintain our Sector Underperform recommendation with a reduced 12-month target price of $0.25 per share ($1.50 previously). Our price target is based on our base NAV and equates to a 2015E EV/DACF multiple of ~5.3 times. (LEWKO)>>

[dan_s]

http://www.bloomberg.com/news/2014-12-1 ... cmpid=yhoo

My take today is that unless oil prices go a lot lower and stay low for a long time, Lightstream will survive. It may never restore the dividend (unless oil goes back to $100/bbl). If you still own it, take a hard look at my forecast model (under the Watch List Tab) and look very closely at their production mix and the hedges at the bottom of the spreadsheet. Lightstream will generate approximately $0.50Cdn cash flow from operations in the 4th quarter. CFPS was $0.65Cdn in Q3.

I do not think they will sell their stake in the Bakken at a "bargain price". They are nowhere near that point. Per their November SEC filings their liquidity is not an issue. The company generates enough cash flow to fund a two rig program and pay the reduced dividend.

I will be dropping it from the High Yield Income Portfolio because of the reduced dividend.

[cviller]

Dan,
Do you understand management's thinking well enough to say why they didn't just eliminate the dividend rather than cut it by 60%? I couldn't understand why they didn't eliminate rather than cut in half the dividend a couple of years ago. I can't understand their flirting with these liquidity/debt issues. Thanks.

[jsb1949]

Dan, for those of us deeply underwater on LTS, will it ultimately recover assuming
oil comes back in the next few years?

[dan_s]

There are a lot of Canadian companies that want to be lumped in with the group that pays regular dividends. Lightstream is in that camp. A lot of folks are in it for the dividends. At today's share price the annual yield is ~13%. It pays dividends monthly.
CALGARY, ALBERTA--(Marketwired - Dec 15, 2014) - Lightstream Resources Ltd. ("Lightstream") (LTS.TO) is announcing that our cash dividend for the month of December will be $0.015 per Lightstream share, payable on January 15, 2015 to all Lightstream shareholders of record on December 31, 2014. The December dividend represents a decrease of $0.025 from the previous monthly dividend of $0.04 per share. The ex-dividend date is December 29, 2014.

Will the share price ever come back? Maybe, if:
> They can sell their Bakken assets for close to the company's debt of $1.6 Billion
> which will only happen if oil move back toward $100/bbl.

P2 reserves at the end of 2014 s/b around 200 million boe.

[davidc257]

So if deeply in the red on LTSM would you take the loss and transfer the proceeds on sale to one of the sweet 16 or hold?
Not holding you to it - just want input.

Regards
David

[dan_s]

When the price of oil crashed in 2008, some of the best buys were small-caps that had a solid base of production that carried them to the "other side". For example, GeoResources, DNR and GPOR all traded under $3.00/share during the 2nd half of 2008. GeoResources was bought out a few years later at over $35/share. DNR got up to $20 and GPOR ran up to over $75/share.

This week I am taking a very hard look at the companies in our Small-Cap Growth Portfolio. The conservative "Fair Value Estimates" I am coming up with (at today's oil & gas prices) are more than double their current share prices. GST, CPE, AXAS and TPLM all look very cheap at today's share price. I will be sending out an updated profile on TPLM later today. We published an update profile on AXAS on Monday.

Near term, the companies with more natural gas production and a lot of their oil hedged are the safest bets.

You can find updated forecast models for all of the companies in our Small-Cap Growth Portfolio under the Watch List Tab. Production mix is shown at the bottom of each forecast model and I also show a table of their hedge positions.

Lightstream should survive until oil prices rebound, then it should move higher. Right now I think taking the loss on Lightstream and moving to GST would give you a better chance.

[k1f]

Dan, some clarification would be useful. You've been saying consistently that Lightstream can handle a period of $60
(Can?) crude. Yesterday, however, you said the share price may only recover if they sell their Bakken play. Since a
dead share price more or less means a crippled company, everything points to a Bakken sale. Do we know what their
break even crude price is in the Bakken? If many shale plays are no longer viable in this pricing environment, is a
Bakken sale a longshot? LTS seems a lot weaker than you were thinking even a week ago.

This slump seems to be indicating that many shale plays are seriously overvalued, and that E&Ps with crude are no longer
a better bet than gassers. What's your take on these premises?

[jsb1949]

Dan, LTS is a very difficult situation for me as I was seriously overweight in energy and LTS is
my largest position. I'm down well over 100k on it and since it's in my SEP taking a tax loss is pointless.

I'm basically trying to determine whether the best shot at recovery is to stay where I am or to move
into something else. It seems to me that you've gone from being very high on LTS to being less than
thrilled with it's long term prospects all in a few weeks and that is very disturbing. I can accept that
a full recovery is very unlikely but I'd surely like to recover as much as possible. Any guidance would
be very welcome.

[dan_s]

Leverage works both ways. If oil stays near current levels for over a year, Lightstream will survive since their cash lifting costs + transportation costs are approximately $15Cdn per boe of production. They have more than enough cash flow to pay their interest expense and the reduced dividend. Cash flow from operations (including G&A and interest expense) should be approximately $100Cdn million this quarter (down from $131 million in Q3). Cash flows from operations should be more than enough to fund their reduced capital budget for 2015.

They do not need to sell their Bakken assets to survive. Management has made it clear this is not a "fire sale".

My current view is that oil prices will stay low until Q3 of 2015, unless OPEC calls an "emergency meeting" to cut production. I do think there is a chance they do it in late Q1, but that is anyone's guess. By "Leverage works both ways" I mean that when oil prices rebound, Lightstream's cash flows from operations will go up and their debt service will remain the same. They will have more cash for increase drilling or increased dividends.

I think there are better choices for a rebound in our Small-Cap Growth Portfolio companies. Check out the recently updated profiles under the Watch List Tab. Now is the time to take a very hard look at production mix and hedges.

[k1f]

Dan, What about the LTS's Bakken turf? At what price crude does it break even? Does your estimate of lifting costs include the
Bakken resource? What factors would make the other small cap growth E&Ps better prospects for a rebound? The LTS debt? It's production was looking pretty robust for its capitalization. Those of us who've believed in the LT viability of the company
can't get enough market value out of tax loss selling to make a meaningful recovery by switching horses now.

[davidc257]

Thank you for the input.

David

[dan_s]

k1;
I recommend making investment choices based on what you know now, not what you have in a certain stock. I do understand that "you have not lost anything until you sell" BUT moving the money you have in Lightstream to another small-cap with a much better chance to rebound may be the way to go. Of course, it is always up to you. [One thing to keep in mind is that LTS does pay a monthly dividend and even at the reduced rate it generates annual yield of ~13%.]

Lightstream's Bakken Business Unit now holds approximately 90 million Boe of proven reserves. See link below for details.
http://www.lightstreamresources.com/ope ... s-unit.cfm

Yes, all in cash lifting, gathering, processing and transportation costs for Lightstream in the Bakken are under $15/boe. Therefore, the netbacks are still quite good. There are quite a few companies based in Canada that will bid on it. However, I do not think Lightstream will sell it unless they think it is a fair offer based on management's long-term outlook for oil prices. Lightstream's current Bakken production is ~15,000 boepd (mostly light oil), so a sales price north of $1Billion is not unreasonable. Light oil producing properties, especially those with a big proven reserve base and development upside, are selling for $80,000 to $100,000 boepd. Since most (if not all) of Lightstream's Bakken acreage is HBP, there is no pressure to drill.

Note: The Non-Core assets that Lightstream sold early this year went for $115,400Cdn per boepd

For well economics in the Bakken see Slide #22 of their December presentation. F&D costs are about $24/boe.

[dan_s]

Here is a "Quick Hit" idea for you. I think Gastar's pfd stock will quickly move back to par when they report Q4 results, which are sure to include an impressive year-end reserve report. If natural gas prices move over $4.00/mcf, it may happen within 30 days. Plus, you get a nice monthly dividend.

[bearcatbob]

Re GST:

If you want a quick hit and Dan is right on GST - simply sell Jan $2.5 puts.

Bob

[k1f]

Dan, the data on LTS turf in the Bakken is very useful. And better than anticipated. Thanks.

[jsb1949]

How on earth can an energy stock under perform oil by 14% in a single day. I'd have bet that wasn't
even possible. Come to think of it, I did make that bet, and lost.