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Cardinal Energy in "envious position", to grow via acquisitions: Dundee Capital

Last updated: 04:19 15 Jan 2015 AEDT, First published: 05:19 15 Jan 2015 AEDT

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Cardinal Energy (TSE:CJ) has a "best in class" balance sheet, and is well positioned to acquire, according to Dundee Capital Markets, which reiterated its buy rating and $15.50 target price on the junior oil and gas producer Wednesday.

The Canadian company, with assets in southeastern Alberta, announced a financial update and highlighted its intent to maintain its dividend for 2015, supported by a strong hedging book, the "best-in-class decline rate" (10-12 percent) and clean balance sheet.

Thirty-five percent of Cardinal's 2015 production is hedged at C$97 per barrel, it said.

The company also reported that it exited 2014 with net debt at $58 million, in line with Dundee's estimate. 

"Management expects to take a cautious approach spending a minimal amount on maintenance capex and no funds allocated to drilling," wrote Dundee analyst Chad Ellison in his research note released earlier today.

"As a result, production for Q1 is expected to be 11,000 BOE/d with free cash flow paying back $10-15 million of net debt, making an already healthy balance sheet even more pristine."

He said the company is in an "envious position", with free cash flow flowing from its assets and minimal planned capex spend. Cardinal thus expects no reduction to its dividend this year.

"On our estimates, Cardinal does not breach the 100% total payout ratio level until ~US$55 WTI, even then we believe the company could cut further discretionary capex and receive additional benefit from its DRIP," Ellison added.

He noted that Cardinal is planning to announce more detailed guidance for the year once oil prices stabilize. 

In addition, the company's release, according to Ellison, alluded that Cardinal's "plans for debt reduction will be intact barring any acquisitions, with accretive targets expected to materialize in Q2/Q3."

"We see Cardinal uniquely positioned given its clean balance sheet and strong hedge book while many of its peers will be forced to liquidate at discount prices," Dundee said.

With competition expected to be thin in terms of acquisitions, Cardinal could see the addition of lighter, lower op cost barrels to bolster its sustainability. This is a change from the past two years that has seen the company outbid on a number of light oil targets.

"We expect to see Cardinal opportunistic and be able to provide accretive growth through acquisitions," Ellison concluded.

Shares of Cardinal were trading down 0.3 percent at C$12.17 on Wednesday afternoon.

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