CIBC World Markets Inc. lowered its price target on shares of Fairborne Energy Ltd. (TSE:FEL) to $3.25 from $3.50, while maintaining its "Sector Performer" rating.
After the company's announcement of Sinclair Property sale, the brokerage reduced its 2012 cash flow per share estimate to $0.49 from $0.59 and its 2013 estimate to $0.71 from $0.84.
Fairborne announced that it is selling its interest in the Greater Sinclair area in Manitoba/Saskatchewan for $80 million to a private oil and gas company. CIBC believes the deal is very accretive at $25.46/Bbl on a P+P reserves basis and about $114,300/Bbl/d on a producing basis.
Prior to the sale, CIBC estimated 2012 discounted cash flow of 3.8 times (versus the group at 2.8 times) with about 26% of its bank line not utilized. Hence, its biggest concern for Fairborne was its balance sheet strength. While Fairborne is addressing debt concerns, it now has limited future low-risk oil opportunities to exploit.
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The firm has updated net asset value (NAV) to reflect the divestiture of reserves and cash inflow. With the sale, its Risked NAV decreases to $4.02/share. Applying the same 0.8 times as before, CIBC has decreased price target to $3.25/share.
Fairborne trades at a discount to its peers at 49% of its Risked NAV and at 6.1 times 2012 EV/DACF versus its peers at 67% and 7.8 times, respectively. While the company's balance sheet is now strengthened, the company is now more reliant on increasing natural gas prices.
Fairborne Energy, which is an exploration and production company, is engaged in the business of exploring for, developing, acquiring and producing crude oil and natural gas in Western Canada. Its portfolio is concentrated in four main core areas in Alberta, Saskatchewan and Manitoba that include Clive, Harlech, Marlboro and Sinclair.
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FEL is trading down 1.52% at $1.95 on Tuesday.