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Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
Pegasi Energy Research Note July 18, 2012
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Pegasi Energy Research Note July 18, 2012

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Pegasi Energy Research Note

Pegasi Energy Research Note

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  • 1. Pegasi Energy Resources Corp. Pegasi Energy Resources Corp. engages in the exploration and production of natural gas and oil in the east Texas oil and gas region. The company holds interests in properties located in Marion and Cass County, Texas.July 18, 2012 P: 646-875-4973 www.caprockrm.comChris Jarvis, CFA, CMT Symbol: PGSI Recommendation: Strong BuyPresident & CEO Last Price: $0.83 Target Price: $1.50chris@caprockrm.com Risk: Speculative Sector: EnergyPeter WhiteExecutive Vice President & CFOpeter@caprockrm.com Successful Beta Well Validates Cornerstone Project Action: We are reiterating our STRONG BUY rating on Pegasi Energy Resources Corporation and 12-month price target of $1.50. Our valuation is based on applying an 8.82x multiple to our Next Twelve Months (NTM) EPS estimate of $0.17. We believe our valuation is conservative given the fact the multiple represents a 13% discount to the company’s peer group average multiple of 10.07x. As a result, we expect as the company continues to execute the “Corner Stone” project further, there is room for multiple expansion as more investors be accustomed to our investment thesis. Summary: • With the success of the company’s beta well, we believe PGSI’s strong management team with geological experience and expertise in the Rodessa field and ability to accumulate and consolidate acreage will drive and maximize shareholder wealth. • For our calendar year 2013, we are significantly raising our EPS estimates from $0.30 per share to $0.42 with total revenue of $35.5 million, which is based on two new horizontal wells coming online in CY2013.
  • 2. Caprock Risk Management, LLC 7/18/2012 Investment Summary Update On July 10th, PGSI issued a press release for the production results of the Morse Unit # 1- H beta well. The company successfully completed a 2,000 foot lateral, 5-stage frac job beta horizontal well. The initial production results of the beta well yielded 281 barrels of oil a day over a 5-day period. We believe the successful completion of the Morse Unit #1-H beta horizontal well is material for the following five reasons: 1) Proof of Concept. The production results for the Morse Unit #1-H beta horizontal well confirms PGSI’s management’s proof of concept for the “Reiterating company’s “Corner Stone” project. We believe the success of the beta well sets STRONG BUY the stage for additional horizontal wells, which management indicated would be rating, 12- roughly 3,000 to 5,000 foot laterals with multi-frac stages ranging from 15 to 25 month price that will yield between 800 barrels a day to roughly 1,400 barrels a day in new target of $1.50” production for each additional well. New oil production at these levels will have a material impact on the company’s revenue and earnings growth for the foreseeable future that will drive shareholder wealth and enhancing the risk/reward profile for shares of PGSI. 2) Multi-Product Profile. PGSI has been a one dimensional play solely focused on natural gas to this point. The successful completion of the beta well and proof of concept for the “Corner Stoner” project will have a positive material impact on the company’s business model, which now will be dominated by oil revenues while still providing investors with vast portfolio of natural gas production that has been hampered by historically low natural gas prices. A reversal of natural gas prices back to normalized levels in and around $4.00 MMBtu coupled with the new oil production slated to come online over the next 18 months should generate significant earnings growth and with it, a higher market capitalization. 3) Learning Curve. The beta well also provides crucial data for piping and other drilling/fracing operations that will optimize the completions for the company’s future horizontal wells. We believe this will also help reduce the costs for new horizontal well completions while optimizing production. 4) New Production comes from possible reserves. The Bossier shale where the horizontal well was drilled and the geological area of the two new horizontal wells being drilled over the next 12 months comes from the company’s possible reserves. Given this, PGSI’s P1 (proved producing) should increase materially as PGSI unlocks the value of the company’s underlying reserves, bolstering shareholder value. 5) Easier access to Capital. With the success of the beta well, we expect the company to be able to raise additional capital more efficiently at a reduced cost of capital given the proof of concept of the “Corner Stone” project. In summary and as we highlighted in our initiation report dated May 14, 2012, we stated the following as part of our investment thesis, PGSI’s management team has a long track record of success operating in East Texas, specifically the Rodessa field, dating back to the early 1980’s. In addition, PGSI’s management has been focused extensively on the 2
  • 3. Caprock Risk Management, LLC 7/18/2012 “Corner Stone” project for over a decade now and long before PGSI became a public entity. We believe the years of experience and intimate knowledge that management brings to the table is on the cusp of bearing fruits for PGSI investors, which starts with the company’s first horizontal well that is expected to be completed by June. With the success of the company’s beta well, we believe PGSI’s strong management team with geological experience and expertise in the Rodessa field and ability to accumulate and consolidate acreage will drive and maximize shareholder wealth. We are reiterating our STRONG BUY rating on Pegasi Energy Resources Corporation and 12-month price target of $1.50. Our valuation is based on applying an 8.82x multiple to our Next Twelve Months (NTM) EPS estimate of $0.17. We believe our valuation is conservative given the fact the multiple represents a 13% discount to the company’s peer group average multiple of 10.07x. As a result, we expect as the company continues to execute the “Corner Stone” project further, there is room for multiple expansion as more investors be accustomed to our investment thesis. Earnings Outlook With the successful completion of the Morse Unit # 1-H well and our recent conversations with management, we are revising our 2012 and 2013 drilling program as well as our revenue and earnings estimates accordingly: • For the drilling of the second horizontal well, we are moving the start date of the initial drilling from August 2012 to October 2012 to accommodate PGSI’s capital needs to fund the project. • We estimate that the second well will take several months to drill and be completed, which will likely occur in December 2012 and revenues beginning the first quarter of 2012. • As a result, we are lowering our calendar year 2012 revenue and earnings per share estimates. For revenues, we are taking down our estimates from $10.9 million to $3.9 million and earnings per share from $0.06 to a loss of $0.05 per share (mainly coming from the large derivative loss in the first quarter of 2012 and timing of the second well). We believe the company will become cash flow and earnings positive in 3Q2012, or EPS of $0.01. • For the Next Twelve Months (NTM), we are lowering our EPS estimate from $0.24 per share to $0.17 per share with total revenue of $17.3 million, which again is due to the timing of the second well in addition to trimming our oil price target for 2012 from an average price of $100 a barrel for the year around $90 a barrel. • For our calendar year 2013, we are significantly raising our EPS estimates from $0.30 per share to $0.42 with total revenue of $35.5 million, which is 3
  • 4. Caprock Risk Management, LLC 7/18/2012 based on two new horizontal wells (2nd well coming online January 2013 and 3rd well coming on line in July 2013) coming online in CY2013 (introducing our 2013 model on page 6). For 2013, we are maintaining our average crude oil price target of $100 but there are growing risks to this estimate, which may lead us to cut our oil price forecast for 2013 in the near future. In summary, we believe our new production schedule is conservative with only two new horizontal wells coming online over the next 18 months. Clearly as PGSI successfully executes the “Corner Stone” strategy, we believe PGSI will quickly attract additional capital to fund other projects making our two new well estimates for 2013 conservative (possibility of drilling up to 5 new wells if the company continues to execute and attracts additional investment capital). Furthermore, we have estimated that the two new horizontal wells coming online in 2013 will be 4,000 foot laterals with a 20 stage frac profile yielding 1,100 barrels a day each of new production. Again, our estimates are based on the mid- range of guidance, which was provided in PGSI’s press release on July 10th that suggested a range of 3,000 to 5,000 foot laterals with 15 to 25 multiple frac stages and a range of 800 BOD to 1,400 BOD of new production. 4
  • 5. 2012 Earnings Model Pegasi 100 100 100 100 103 95 82 93 85 90 90 88 95 95 95 95 94 Earnings Model 2.50 2.30 2.15 2.32 2.05 2.49 2.50 2.35 2.50 2.50 2.50 2.50 2.50 2.75 3.00 2.75 2.48 31 29 31 30 30 31 30 30 31 31 30 31 31 30 31 31 365 De scription Jan-12 Feb-12 Mar-12 1Q 2012 Apr-12 May 2012 Jun-12 2Q 2012E Jul-12 Aug-12 Sep-12 3Q 2012E O ct-12 Nov-12 Dec-12 4Q 2012E 2012E Revenues T otal Oil Revenues $ 98,820 $ 33,552 $ 31,603 $ 107,217 $ 172,372 $ 542,656 $ 534,360 $ 481,053 $ 1,558,069 $ 488,242 $ 439,789 $ 423,129 $ 1,351,160 $ 3,180,420 T otal Gas Revenues 69,188 18,282 22,422 47,279 $ 87,983 46,359 43,988 66,480 $ 156,826 64,631 64,766 68,766 $ 198,164 512,161 Condensate & Skim Oil 12,470 4,500 4,500 4,500 $ 13,500 4,500 4,500 4,500 $ 13,500 4,500 4,500 4,500 $ 13,500 52,970 T ransportation & Gathering 39,319 12,000 12,000 12,000 36,000 12,000 12,000 12,000 36,000 12,000 12,000 12,000 36,000 147,319 Total Re venues 219,797 68,334 70,525 170,996 309,854 605,515 594,847 564,033 1,764,395 569,373 521,056 508,395 1,598,824 3,892,870 COGS 121,822 20,025 20,627 48,257 88,908 167,749 164,816 156,342 488,907 157,810 144,523 141,042 443,375 1,143,013 Gross Profit Margin 97,975 48,309 49,898 122,739 220,946 437,766 430,031 407,691 1,275,488 411,563 376,532 367,354 1,155,449 2,749,858 Operating Expenses General & Administrative 1,378,071 170,833 170,833 170,833 512,500 170,833 170,833 170,833 512,500 170,833 170,833 170,833 512,500 2,915,571 Sales & Marketing 30,000 10,000 10,000 10,000 30,000 10,000 10,000 10,000 30,000 10,000 10,000 10,000 30,000 120,000 Miscellaneous 7,500 2,500 2,500 2,500 7,500 2,500 2,500 2,500 7,500 2,500 2,500 2,500 7,500 30,000 Total O pe rating Expenses 1,415,571 183,333 183,333 183,333 550,000 183,333 183,333 183,333 550,000 183,333 183,333 183,333 550,000 3,065,571 EBITDA (1,317,596) (135,024) (133,436) (60,594) (329,054) 254,432 246,698 224,357 725,488 228,229 193,199 184,020 605,449 (315,713) Hedging & O the r De rivatives (1,201,114) - - - - - - - - - - - - (1,201,114) Inte rest Expe nse 157,943 55,000 55,000 55,000 165,000 55,000 55,000 55,000 165,000 55,000 55,000 55,000 165,000 652,943 De pre ciation & Amortization 67,418 25,000 25,000 25,000 75,000 25,000 25,000 25,000 75,000 25,000 25,000 25,000 75,000 292,418 Ne t Income Be fore Taxe s (2,744,071) (215,024) (213,436) (140,594) (569,054) 174,432 166,698 144,357 485,488 148,229 113,199 104,020 365,449 (2,462,188) Tax Expense (2012 tax rate 0%) - - - - - - - - - - - - - - Ne t Income (2,744,071) (215,024) (213,436) (140,594) (569,054) 174,432 166,698 144,357 485,488 148,229 113,199 104,020 365,449 (2,462,188) Earnings Per Share ($) - - - (0.05) (0.00) (0.00) (0.00) (0.01) 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.01 (0.05) Share s O utstanding (in 000s) 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 Source: Company Data, CRM Estimates
  • 6. 2013 Earnings Model Pegasi 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Earnings Model 3.00 3.00 3.00 3.00 3.00 2.75 2.75 2.83 2.75 2.75 3.00 2.83 3.00 3.25 3.50 3.25 2.98 31 29 31 30 30 31 30 30 31 31 30 31 31 30 31 31 365 Description Jan-13 Fe b-13 Mar-13 1Q 2013E Apr-13 May-13 Jun-13 2Q 2013E Jul-13 Aug-13 Sep-13 3Q 2013E O ct-13 Nov-13 Dec-13 4Q 2013E 2013E Revenues T otal Oil Revenues $ 2,784,792 $ 2,415,647 $ 2,394,572 $ 7,595,011 $ 2,149,052 $ 2,059,572 $ 1,848,669 $ 6,057,293 $ 4,154,603 $ 3,863,646 $ 3,477,831 $ 11,496,080 $ 3,405,819 $ 3,125,641 $ 3,064,959 $ 9,596,419 $ 34,744,803 T otal Gas Revenues 29,853 27,229 28,379 $ 85,461 26,777 24,730 52,044 $ 103,550 50,995 48,386 79,776 $ 179,157 77,558 76,542 80,227 $ 234,327 602,495 Condensate & Skim Oil 4,500 4,500 4,500 $ 13,500 4,500 4,500 4,500 $ 13,500 4,500 4,500 4,500 $ 13,500 4,500 4,500 4,500 $ 13,500 54,000 T ransportation & Gathering 12,000 12,000 12,000 36,000 12,000 12,000 12,000 36,000 12,000 12,000 12,000 36,000 12,000 12,000 12,000 36,000 144,000 Total Re venue s 2,831,145 2,459,376 2,439,451 7,729,972 2,192,329 2,100,802 1,917,212 6,210,343 4,222,098 3,928,532 3,574,107 11,724,737 3,499,876 3,218,683 3,161,686 9,880,246 35,545,298 COGS 779,798 677,561 672,082 2,129,441 604,123 578,953 528,466 1,711,543 1,162,310 1,081,579 984,112 3,228,001 963,699 886,371 870,697 2,720,766 9,789,751 Gross Profit Margin 2,051,348 1,781,814 1,767,369 5,600,531 1,588,205 1,521,849 1,388,746 4,498,800 3,059,788 2,846,953 2,589,994 8,496,736 2,536,177 2,332,313 2,290,990 7,159,480 25,755,547 Operating Expenses General & Administrative 170,833 170,833 170,833 512,500 170,833 170,833 170,833 512,500 170,833 170,833 170,833 512,500 170,833 170,833 170,833 512,500 2,050,000 Sales & Marketing 10,000 10,000 10,000 30,000 10,000 10,000 10,000 30,000 10,000 10,000 10,000 30,000 10,000 10,000 10,000 30,000 120,000 Miscellaneous 2,500 2,500 2,500 7,500 2,500 2,500 2,500 7,500 2,500 2,500 2,500 7,500 2,500 2,500 2,500 7,500 30,000 Total O pe rating Expe nse s 183,333 183,333 183,333 550,000 183,333 183,333 183,333 550,000 183,333 183,333 183,333 550,000 183,333 183,333 183,333 550,000 2,200,000 EBITDA 1,868,014 1,598,481 1,584,036 5,050,531 1,404,872 1,338,515 1,205,413 3,948,800 2,876,455 2,663,620 2,406,661 7,946,736 2,352,844 2,148,979 2,107,657 6,609,480 23,555,547 He dging & O the r Derivatives - - - - - - - - - - - - - - - - - Inte rest Expense 55,000 55,000 55,000 165,000 55,000 55,000 55,000 165,000 55,000 55,000 55,000 165,000 55,000 55,000 55,000 165,000 660,000 Depre ciation & Amortization 25,000 25,000 25,000 75,000 25,000 25,000 25,000 75,000 25,000 25,000 25,000 75,000 25,000 25,000 25,000 75,000 300,000 Net Income Before Taxe s 1,788,014 1,518,481 1,504,036 4,810,531 1,324,872 1,258,515 1,125,413 3,708,800 2,796,455 2,583,620 2,326,661 7,706,736 2,272,844 2,068,979 2,027,657 6,369,480 22,595,547 Tax Expense (2012 tax rate 0%) - - - - - - - - - - - - - - - - - Net Income 1,788,014 1,518,481 1,504,036 4,810,531 1,324,872 1,258,515 1,125,413 3,708,800 2,796,455 2,583,620 2,326,661 7,706,736 2,272,844 2,068,979 2,027,657 6,369,480 22,595,547 Earnings Pe r Share ($) 0.03 0.03 0.03 0.09 0.02 0.02 0.02 0.07 0.05 0.05 0.04 0.14 0.04 0.04 0.04 0.12 0.42 Share s O utstanding (in 000s) 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 54,220 Source: Company Data, CRM Estimates
  • 7. Caprock Risk Management, LLC 7/18/2012 Disclosures and Certification: Independent Fee-Based Research • CRM only accepts cash compensation for our work and do not accept any compensation contingent on the content or conclusions of the research or the resulting impact on share price. • Report Discloser: - CRM received a 12-month contract for $4,116 a month starting March 15, 2012 to launch and maintain independent fee-based research on Pegasi Energy Resource Corporation shares. - CRM and/or our staff have no personal, professional, or financial relationship with Pegasi or its subsidiaries, agents, or trading entities. - CRM analyst credentials, including professional designations and experience: Chris Jarvis is Chairman, Chief Executive Officer, and President of Caprock. He has served as Senior Commodities Strategist for vFinance Investments, a unit of National Holdings Corporation of New York, New York. Prior to working at National, Mr. Jarvis was a senior energy and commodities strategist with Merrill Lynch and Advest. He holds a BA from University of Massachusetts and a MBA from University of Connecticut. Christopher has earned the right to use the Chartered Financial Analyst (CFA) designation. He is a member of the CFA Institute. Lastly, Christopher has also earned the right to use the Chartered Market Technician (CMT) designation and is a member of Market Technicians Association (MTA). • CRM will provide continuing coverage on Pegasi. Interested parties can either visit www.caprockrm.com or email Chris Jarvis at Chris@caprockrm.com or Peter@caprockrm.com for future updates. • CRM is not aware of any matters that could reasonably be expected to impair our objectivity in drafting the report. • There is no history of recommendations for the subject-company and number and distribution of recommendations for all companies we cover. • I, Christopher C. Jarvis, hereby certify that the analysis or recommendations contained in the report, if any, represent the true opinions of the author or authors. • CRM refrains from engaging in, or receiving compensation from, any investment banking or corporate finance-related activities with the issuer. 7
  • 8. Caprock Risk Management, LLC 7/18/2012 • CRM’s analyst(s) do not share information about the subject company or the timing of the release of a research report with any person who could have the ability to trade in advance of (“front run”) the release of a report. • CRM and affiliates refrain from trading in the shares of the subject company in advance of the release of a report or update. • CRM refrains from trading in a manner that is contrary to, or inconsistent with, the employees’ or the firm’s most recent published recommendations or ratings, except in circumstances of unanticipated extreme financial hardship. • CRM abides by all laws, rules, and regulations that apply to registered or regulated analysts. About Caprock Chris Jarvis, CFA, CMT founded Caprock Risk Management, LLC (“CRM” or “Caprock”) in 2006. Caprock’s mission is to add value for our clients by providing superior market intelligence and advisory services for energy risk management. Management and Employees Chris Jarvis is Chairman, Chief Executive Officer, and President of Caprock. He has served as Senior Commodities Strategist for vFinance Investments, a unit of National Holdings Corporation of New York, New York. Prior to working at National, Mr. Jarvis was a senior energy and commodities strategist with Merrill Lynch and Advest. He holds a BA from University of Massachusetts and a MBA from University of Connecticut. Christopher has earned the right to use the Chartered Financial Analyst (CFA) designation. He is a member of the CFA Institute. Lastly, Christopher has also earned the right to use the Chartered Market Technician (CMT) designation and is a member of Market Technicians Association (MTA). Peter White is Executive Vice President and Chief Financial Officer. Mr. White is an innovative and proficient executive with over 30 years of experience with private and publicly traded companies in the financial and investment sectors. A CPA, Mr. White has a MBA from New York University and an MAB from Bowdoin College.
  • 9. Caprock Risk Management, LLC 7/18/2012Disclaimer This publication is intended for informational purposes only and the opinions set forth herein should not be viewed as an offer or solicitation to buy, sell or otherwise trade Equities, futures and/or options. All opinions and information contained in this document constitute Caprock Risk Management (CRM) judgment as of the date of this document and are subject to change without notice. CRM, persons connected with it, members of the CRM, subsidiaries and affiliates ("Affiliated Companies") and their respective directors and employees may, directly or indirectly, effect or have effected a transaction for their own account in the investments referred to in the material contained herein before or after the material is published to any customer of an Affiliated Company or may give advice to customers which may differ from or be inconsistent with the information and opinions contained herein. While the information contained herein was obtained from sources believed to be reliable, no Affiliated Company accepts any liability whatsoever for any direct, indirect or consequential loss arising from any inaccuracy herein or from any use of this document or its contents. This document may not be reproduced, distributed, or published in electronic, paper, or other form for any purpose without the prior written consent of CRM. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. 9

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