The announcement that Surge Energy (CVE:SGY) is to acquire private firm Mount Bastion Oil and Gas Corp (MBOG) for $320mln has a positive read-across for junior oiler Prairie Provident Resources Inc (TSE:PPR), reckons broker Mackie Research.
The pair has similarly sized assets and the transaction values Prairie at between C$1.31 and C$1.96 per share (current price C$0.42) per share, it says.
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With around 5,500 boe/d (barrels of oil equivalent per day) of production and 25 million boe (barrels of oil equivalent) of proven plus probable reserves (2P), MBOG and PPR and have similarly sized assets, said Bill Newman.
"Based upon the acquisition cost price of $320 million, this infers a value of $2.13 per share for PPR," he added.
"We note that MBOG’s has a higher percentage of oil production at 98% versus PPR’s 70%. As a result, we have adjusted our valuation based on operating income. A net operating income multiple of 3.8x values PPR at C$1.01 per share which is a 132% premium to the current stock price."
Newman added that Prairie's 2P(proved and probable) reserves at $12.80/boe, values the group at C$1.66 per share or a 282% premium to the stock price.
Including a conservative potential value a favourable ruling from the arbitration tribunal related to the termination of a licence in Quebec, expected in the second half of 2018, the valuation increases to C$1.31 to C1.96 per share.
"The Surge/MBOG underlines how undervalued PPR is at the current market price and the multi-bagger potential for investors. We reiterate our BUY recommendation and our $2.00 target," concluded the Mackie analyst.