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Cardinal Energy's "conservative, low risk business model" pays off, says broker

Published: 02:24 25 Mar 2015 AEDT

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Cardinal Energy's (TSE:CJ) shares increased on Tuesday after the company announced better than expected quarterly production figures and cash flow in line with estimates.

The oil and gas producer, with assets in southeast Alberta, posted net income of $26.9 million for the three months to December 31, or 46 cents per share, compared to a net profit of $36.4 million, or $2.33 per share, in the year earlier period.

Funds from operations surged to 46 cents from 8 cents, however, while petroleum and natural gas revenue grew over 400 percent to $63.2 million from $12.2 million.

Average daily production rose to 10,888 barrels of oil equivalent per day (boe/d) from 2,155 boe/d, as the company completed two acquisitions in Wainwright, Alberta during the third quarter of last year. The assets totaled some 4,400 boe/d of low decline production at the time of acquisition, and were 99 percent operated, with a high working interest in associated infrastructure.

Cash flow per share of 48 cents, adding back transaction costs of 2 cents per share, was in line with consensus estimates, and higher than Dundee Capital's forecast of 44 cents.

Dundee, which has a buy rating on Cardinal, said production during the latest period was "oilier" than forecast, with 93.7 percent liquids, while higher realized pricing also contributed to the strong results. 

"The quarter marks the first full calendar year that Cardinal has been publicly traded and it has taken very little time to show investors that its conservative, low-risk business model works, especially in the worst of times," wrote Dundee analyst Chad Ellison, who upped his price target on the company to C$15.75 from C$15.00 in a note released Tuesday.

The report highlighted that management has been vocal in maintaining a conservative business model since its IPO, with a flexible budget requiring maintenance capital, a clean balance sheet, and sustainable dividend with a low payout ratio. 

"As a result, despite the fall in commodity prices the company has been able to continue to screen well on key metrics," Ellison said.

Dundee estimates that Cardinal will be fully able to pay its dividend while continuing to repay debt and maintain steady growth this year. For 2015, the company is forecasting a capex budget of $30 million, and production of 11,200 boe/d. 

"We continue to believe that management's strategy of owning low decline high quality assets coupled with a clean balance sheet will warrant a higher valuation over time, especially in a fickle market," the analyst added.

Shares of Cardinal rose 7.2 percent early Tuesday, to C$15.45 in Toronto. Year-to-date, the stock has advanced over 13 percent.

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