Zoom Q3 FY2022 Earnings Report Recap

Red Prairie Pumpjack in Alberta Oil Field

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In November, I explained how I initiated a long position in InPlay Oil (OTCQX:IPOOF) by buying shares of Prairie Storm Resources, which was being acquired by InPlay Oil in a cash and stock deal. Unfortunately the majority of the consideration was paid in cash but this also meant that I was able to acquire InPlay Oil for an implied consideration of just C$0.98 per share. Now, just two months after that article was published, InPlay Oil is trading at around C$3. Due to the very aggressive move up in the company's share price I was considering to sell my position and move to greener pastures. I decided to run all numbers again using the recently published guidance update and decided there appears to be more room to run.

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InPlay Oil's Canadian listing is the most liquid listing and I'd recommend to trade the company's shares on the TSX where it's trading with IPO as its ticker symbol. The current share price is just under C$3, giving the company a market capitalization of around C$255M. The average daily volume in Canada is in excess of 270,000 shares.

The guidance for 2022 is all you need to know

On January 12, InPlay Oil released its FY 2022 guidance update. The board of directors approved a capex program of C$58M which should result in the company producing an average of 8,900-9,400 barrels of oil-equivalent per day. According to IPO, this should result in a production growth of 55%-63% compared to the 2021 production results but I'm not sure that's a fair comparison. After all, the Prairie Storm acquisition was only completed during Q4 so the starting point for the production growth is much higher than the average production rate in 2021.

As such, I think it's better to use the Q3 production rate as starting point. InPlay's own oil projects produced about 6,000 boe/day while Prairie Storm had an attributable output of about 2,000 boe/day. This means that compared to the pro forma Q3 production rate, the production increase in 2022 will be just around 15%.

That's not bad, but it helps to put things into perspective. The Prairie Storm acquisition will help InPlay to rapidly reduce its average decline rate which is anticipated to drop from 26% in 2021 to just 16% in 2022.

InPlay Oil Corporate Presentation

InPlay Oil Corporate Presentation

That's important as this also helps us determine the efficiency of InPlay's drilling. Assuming about 1,500 barrels of oil production per day will have to be replaced to counter the average decline rate, the total capex program of C$58M should help to cover the 1,500 boe/day to mitigate the decline and fund the 900-1,400 boe/day production increase. So for C$58M, InPlay will essentially be able to add 2,400-2,900 boe/day to the production profile. This results in an average capital intensity of just under C$20,000 per flowing barrel.

Of course this interpretation is not 100% correct as there are several other factors at play here such as the timing of the capex and it would also be interesting to know the exit rate InPlay Oil is targeting for 2022. C$20,000 per flowing barrel is relatively high so it looks like InPlay Oil may be a bit conservative here although the company is warning for cost inflation in its guidance update.

So to err on the cautious side, I will use the aforementioned C$20,000 capital intensity per flowing barrel. Should InPlay Oil then for instance end the year with an exit rate of 9,400 boe/day, the company would have to fund the activities to replace 1,500 boe/day in 2023, which would then work out to a capex of C$30M. That's the sustaining capex.


InPlay Oil Corporate Presentation

The 2022 forecast calls for an adjusted funds flow of C$111-117M using US$72.50 WTI and an AECO gas price of C$3.30. That's an important element of my reason to maintain a position in InPlay Oil. Not only does this mean the company will generate in excess of C$50M in free cash flow even after taking the growth capex into account, it also means that at $72.50 oil, the company will likely generate C$80M in sustaining free cash flow in 2023, and likely a bit more as the net debt will fall off a cliff which should result in substantially lower interest expenses which will further boost the adjusted funds flow.

At $72.50 oil, InPlay Oil could convert its net debt into a net cash position by the end of Q1 2023 (and even sooner as every day the oil price exceeds the $72.50, the cash flow will come in above expectations).

I'm also very glad InPlay Oil provided the sensitivity analysis in the table. This allows us to stress-test the cash flows using a more adverse scenario. Should the oil price drop to US$57.5 WTI, and using an AECO gas price of C$2.30, the AFFO will decrease by approximately C$35M (and likely a bit less than that as the royalty bill will be reduced as well). This means that using the aforementioned numbers, the AFFO will still be approximately C$75M resulting in a free cash flow result of C$40-45M. With less than 90M shares outstanding, this means that InPlay Oil will likely still generate a free cash flow result of C$0.50/share.

Investment thesis

And that's also an important reason why I'm planning to maintain a position in InPlay Oil for now. Even at $57.50 WTI, InPlay is currently trading at just 6 times the sustaining free cash flow (defined as the AFFO minus the sustaining capex). The cash flow could receive an additional boost by rapidly paying off the net debt. InPlay Oil is currently paying approximately C$5M per year in interest expenses and paying off the debt could further boost the AFFO by 5%.

Source : https://seekingalpha.com/article/4479398-inplay-oil-every-time-i-want-to-sell-i-look-at-the-numbers-sit-tight