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Miller Energy Resources (MILL) Initiated At 'Hold' By Brean Capital

 December 06, 2012 02:36 PM

(By Balaseshan) Brean Capital analyst Jeff Connolly initiated coverage of Miller Energy Resources Inc. (NYSE: MILL) with a "hold" rating and a $4.00 fair value.

Miller Energy Resources is an exploration and production company operating in the Cook Inlet and Appalachia regions of the United States, Connolly noted.

The analyst forecast Miller will grow production, EBITDA, and discretionary cash flow in fiscal 2013, but remains cautious due to execution risk, management's inconsistent track record, and the stock's valuation relative to our group. Therefore, he is on the sidelines.

Connolly's model assumes the company successfully restores production to the RU-3 and RU-2 wells and produces commercial quantities of natural gas from the exploratory Otter 1 and Olsen Creek wells in fiscal 2013.

Given the company's concentrated revenue stream, if the workovers does not come online in a timely fashion or the exploratory wells does not live up to the analyst's expectations he would cut his numbers.

Connolly's $4.00 fair value estimate is 85% of $4.20 per-share net asset value estimate. Shares of MILL are trading at 11.1 times EV/EBITDA versus the median EV/EBITDA multiple of 5.4 times for his group. He contends the premium multiple is not warranted because of the company's high cost structure and inconsistent track record on timely execution.

The analyst estimates Miller Energy will have the highest lease operating expense per BOE ($30.86) in group this year, reflecting high fixed costs to operate the Osprey platform. While he projects LOE per BOE declines to $18.00 next year as production ramps up at Osprey, it is still projected to be one of the highest cost operators in our group.

Furthermore, management has struggled to meet its targets in the past. The company expected to have Rig 35 installed and operational in January 2012, but inclement weather delayed operations until August 2012. Hence, Connolly's cautious stance on MILL.

MILL is trading down 2.70% at $4.33 on Thursday.

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