initial public offerings (IPOs) trading on American exchanges

Monday, October 17, 2011

Lone Pine Resources - 4 months after IPO

In July, J.P.Morgan has picked up coverage of Calgary-based Lone Pine Resources Inc. with a US$16 price target and Overweight rating, representing upside of more than 45%.

Analyst Katherine Lucas Minyard told clients the company offers investors exposure to a pure-play onshore Canadian natural gas-weighted resource base with high growth potential at an attractive discount. She also highlighted the upside possibility Lone Pine offers due to its increased crude oil production mix.

“Although we see near-term headwinds from high exposure to natural gas, a lack of operating history as an independent company, and the expected upcoming distribution of Forest Oil Corp.’s 82.3% stake, we believe the shares will capture broader market appeal through year-end as Lone Pine establishes an operating track record and the distribution overhang lifts,” Ms. Minyard said in a research note.

Colorado-based Forest Oil Corp. spun off its Canadian operations in June through an IPO of Lone Pine that raised US$183-million.

Lone Pine has an inventory of more than 2,600 drilling locations, with a focus on Western Canada’s Deep Basin.

Ms. Minyard noted its expected production growth of roughly 20% per year in 2011 and 2012, and the its ability to allocate more capital toward aggressive development as an independent company.

Natural gas accounts for an estimated 96% of Lone Pine’s total risked resource base ad 79% of 2011 production, which makes its near-term cash flow heavily dependent on natural gas prices. However, the company is pushing development of the Evi light oil play in Northern Alberta.

As a result, Ms. Minyard forecasts its production mix will shift from 21% liquids in 2011 to 29% in 2012, which will lead to a 70% increase in adjusted EBITDA.

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