| Oil and Gas, Exploration and Production | Initiation of Coverage | |||||
| Growth back in play | |||||
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Investment Recommendation
We are resuming coverage of InPlay Oil with a BUY rating and $6.25 target, which is derived using a blended NAV and EV/DACF-based approach, mapping to a 2023E EV/DACF of 3.4x.
Notably, our target 2023E EV/DACF multiple of 3.4x remains in line with InPlay’s historic forward 12-month EV/DACF multiple of 3.2x. We believe this to be reasonable given its debt-free status at year-end 2022 and its production being well above any point in the company’s history.
Top-tier organic growth all within cash flow
InPlay’s continued operational and financial performance has resulted in the company posting the top production growth (per debt-adjusted share) in our coverage universe. This is particularly impressive considering the growth is being achieved entirely through the drill bit, with the company still posting a debt-adjusted FCF yield (to EV) of ~21% next year on our forecasts. Also notable, InPlay is <25% hedged through H2/22 and is unhedged in 2023.
Outperformer in 2021 with room to run
Last year saw the stock outperform the sector by a wide margin, with its stock price increasing ~850% compared to the Canadian small-cap (<$500M market cap) E&P average of ~340%. This year, the stock has broadly tracked the group, up ~72% year to-date, in line with the group at ~78%. Despite the large move in the stock last year, InPlay still remains undervalued, in our view, trading at 1.8x our 2023E DACF forecasts versus our broader oil-weighted coverage at 2.0.
Debt-free by year-end provides optionality
InPlay recently amended and extended its credit facility, providing $110M of capacity out to May 2023 (maturity date of May 2024). On our estimates, we forecast InPlay to exit 2022 with a net cash position of $0.2M which compares to its historic trailing D/CF of ~2.0x. Given the clean balance sheet in combination with its organic growth outlook, we believe InPlay is in a position of strength that could result in more aggressive growth (organically or inorganically) and/or a return of capital (e.g., through the implementation of a dividend).
Upcoming potential catalysts
With the company expected to be in a net cash position at year-end on our forecasts, we look to InPlay providing preliminary 2023 guidance (or longer-term plans) and believe it will be of relative significance, particularly now that its production levels are approaching the 10,000 boe/d mark.
Valuation
To derive our $6.25/share target price, we have taken a blended approach, applying a 0.8x multiple to our C-NAV calculation and a 3.0x multiple to our 2023E DACF estimate of $143M, weighting each by 50%. We believe this approach captures the value of the company’s near-term (2023) cash flows while incorporating value for its undeveloped reserves and lands.
Our target price implies a 2023E EV/DACF multiple of 3.4x and a P/C-NAV multiple of 0.8x, which compares to the 1.8x 2023E EV/DACF multiple InPlay currently trades at and its peer group average of 2.0x.
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