PQ Still Hitting On All Cylinders, Still Too Cheap

PQ - Petroquest Operations Update. ($17.95) I've been away from the name for a couple of months and kicking myself ever since.  The press release last night contained five pertinent data points, and I may enter Calls for a trade and for 1Q earnings if it gets driven down by the last one:

  • Nice production rates being seen in the Woodford. PQ said it completed its 13th Woodford shale well with an IP of 6.3 MMcfgpd. This is well above target of 2.5 to 4.0 and more than three times the initial rate of the last known rate (the 11th well) we knew about here. At $4.5 mm the well is came in in the middle of the expected cost range. This translates into lower than expected F&D. Production here is now 19,000 Mcfepd, up from 15 at the end of February. They plan to complete two more wells within 2 weeks (just in time for the conference call on April 24th). Also, on the call, look for them to bump up their reported acreage in the play and I suspect they will participate in more wells (potentially non-operated wells) than originally planned.
  • East Texas Growth Continues. Company continues to drill away on lower CV targets in its 50,000 acres in their Carthage field. Rate here now up to 17,000 Mcfepd.
  • Fayetteville Shale Activity: This is a non-operated play for them but it looks like the number of wells here will easily exceed their original plan (they've drilled 37 year today and the plan was to only drill 60 to 80 for all of 2008) and they continue to add acreage.
  • PQ Added More Collars But Remains Lightly Hedged: 40% of expected 2008 production is now hedged, which pretty light to many of its peers.
  • Two of PQ's Gulf of Mexico shelf fields were offline during part of the first quarter. No details on how long they were off but they are not small pieces of production This will cause 1Q08 volumes to come in at the low end of the previous guidance range of 86 - 92 MMcfepd but I think they get a "get of jail free pass" for that (hopefully after a brief sell off) as:
    • the 1Q exit rate was 93 mm/d  and
    • they maintained full year guidance of 94 to 100 MMcfepd (that's 13% YoY growth on the mid point of the range ~ 85% natural gas).

Valuation remains dirt cheap. Last October, I said (PQ) was cheap to the group as it traded at just under 4x 2008 CFPS estimates. At the time (October 16th to be exact with the stock at $12.58:) I wrote:

Its increasing focus on "resource plays will boost its reserve life which should in turn result in cash flow multiple expansion. The company has not yet provided guidance for 2008 and analysts are for the most playing the name pretty conservatively as CFPS estimates for 2008 are in line with those of 2007 at around $3.70. This should change soon as the company puts forward new production growth guidance. (See my initial look at the company here.)

I was right about the numbers coming up... That $3.70 number for 2008 cash flow per share now stands at $4.32 with some analysts printing numbers north of $5.

...But I was wrong about the multiple expansion. It just hasn't happened yet. Looking at 2009 numbers (once you're in 2008 everybody has to look out to the next year for comps) consensus is $4.76. That yields a paltry forward CFPS multiple of 3.8x. Even if you look only to the 2008 numbers (which are very light given the analysts reluctance to mark oil and gas closer to market) PQ still only garners a 4.1 x multiple. That's pretty cheap when you recall the company continues to transition into a longer lived resource play. 2007 saw reserve life expand modestly here to 5 years. 2008 should see a much more marked expansion (especially if they sell their Gulf of Mexico Shelf assets like I previously suggested...what better price environment could you get than this one?).  Anyway, here are the comps as to why I call it cheap. Again, I may be getting long on weakness before their 1Q call.



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