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22 www.resourceworld.com F E B R U A R Y / M A R C H 2 0 1 4 B R O K E R ' S P I C K S A l f S t e w a r t D elphi Energy Corp. [DEE-TSX] is a Calgary-based natural gas and oil producer with a large land holding in the Montney shale gas play in northwestern Alberta. Delphi has lived through the boom and bust cycle of natural gas prices of the last decade. In the last couple of years, the company has concentrated on the development of its Montney liquids rich gas play, estab - lished its substantial acreage position in the midst of the Big Boys such as Exxon, Conoco, Chevron and Apache, and is now harvesting the rewards of its efforts. There are several pre-conceived notions about Delphi in the marketplace that are now out of date, or not relevant accord - ing to a Raymond James analyst who has rated the stock a "Strong Buy" with a target price of $2.70 in his November 27, 2013 report. The first misperception is that Delphi is burdened by high debt relative to its cash flow which will hinder growth. The reality is, as detailed below, that the Montney development at Bigstone East is increasing netbacks and generating more prolific returns, creating a virtuous cycle of increasing cash flows and accelerating development. The second misperception is that Delphi has been around a long time and is only a solid, but unexciting, explo - ration company with modest projects. The reality is that the Bigstone East Project is one of the most exciting and eco- nomic projects in the Western Canadian Sedimentary Basin, with wells that flow initially at over 8 million cubic feet of gas per day and over 1,200 barrels per day of condensate. Moreover, this play is under - pinned by a large 62 section land position with over 200 development drilling loca- tions. Over the next year, Delphi plans to drill seven to eight wells at Bigstone East. So what is the excitement about regard- ing Delphi's Bigstone East Project in the Montney? To quote from a Raymond James report, typical Montney drilling economics are as follows: "On average, we find that a Montney well has a capital cost of $5.4 million, an IP30 of 5.2 mmcfe/d and a 63% decline rate. Based on current strip pricing, this translates to a $3.9 million NPV (10%, before taxes) and a payback of 2.4 years. In our analysis, we did not find as much dispersion of results as we ini - tially thought, but not surprisingly there are areas and operators that are exceeding averages by a considerable margin." Delphi has been able to drill horizontal wells that are twice as long and cost about twice as much, at around $10 million in total cost, with a payback of less than one year, and NPV's in excess of $20 million. This much stronger economic performance is due to higher initial gas flow rates and strong condensate production than typical Montney wells. This was accomplished by the company using a slickwater fracking technology. The company has been contin - uously reducing drilling times, lowering costs and increasing productivity since its initial three wells at Bigstone in 2012. In 2013, six wells were drilled, culminat- ing in a boomer of a well that flowed 9.4 mm cubic feet of gas and 1,250 barrels per day of condensate, announced at the end of November, which was drilled at a cost 25% less than the initial wells in the same area. As to netbacks, the netbacks from Montney production are $22.45 per BOE compared to $13.91 for other Delphi proj - ects. So by focusing on Bigstone East, Delphi is rapidly transforming the compa- ny's cash-generating potential. This makes Delphi Energy my pick of the month. This article expresses the opinions of author, and not necessarily those of Raymond James Ltd. Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. As an investment in Delphi Energy is not suitable for all investors, a recommendation would only be made after a personal review of an individual's financial objectives. Raymond James Ltd., member - Canadian Investor Protection Fund. n Delphi Energy gets its mojo in the Montney "The company has been continuously reducing drilling times, lowering costs and increasing productivity since its initial three wells at Bigstone in 2012."