Calima Energy has strong cash flows and potential for a large resource upside: Hannam & Partners

Calima Energy Ltd (ASX:CE1) offers a combination of value, growth and strong shareholder return potential given its high cash flow, according to Hannam & Partners, which has initiated coverage on Calima. Hannam has initiated coverage with a risked net asset value (NAV) of A2.4 cents per share (current share price:A0.9 cents). The following is an extract from Hannam’s initiation report on Calima: Calima is an Australian listed E&P company, focused on Canada, an established energy market with a supportive energy policy. It has exposure to a large-scale wet gas play in the Montney and - with the completion of its C$61.5mm acquisition of Blackspur on 3rd May - low-cost, high return, oilweighted assets in Alberta. Calima capitalised on the opportunity to acquire Blackspur as the company was struggling in 2020 under a heavy debt burden as COVID hit and oil prices crashed. As well as striking a good deal, Calima has changed its equity story through this transaction to be more aligned with current investor appetite. Calima now gives investors exposure to oil prices and, longer-term, North American gas prices, which we expect to rise. The company offers a combination of value, growth and strong shareholder return potential given its high cash flow. The management team are largely incentivised through equity and strongly aligned with shareholders. Blackspur acquisition: strong growth within cashflow from existing reserves The merger with Blackspur creates a mid-tier, ASX-listed company, with strong cash flow from high return conventional oil assets that have been undercapitalised for several years. Blackspur’s assets offer organic growth through the drill-bit with >20 years reserve life. It has some of the lowest cost (500% IRR at current prices) available globally. We expect >40% production growth in 2022 whilst generating ~15% FCF yield. C$200mm has been invested in the assets historically, versus an acquisition price of ~C$60mm. We see a risked 2P NPV10 of C$168mm for Blackspur, ~175% higher than what Calima paid. There is further upside from an acceleration of production and bettering the well production type curves. Relative to Canadian peers (which are +180% YTD), Blackspur has stronger production and cashflow growth in 2022, a much healthier balance sheet, a higher reserve life and a lower cost base. Montney: large resource with exposure to improving Canadian gas pricing Calima has been a successful explorer in the Montney, proving that its concept worked, extending the play beyond the expected boundary and achieving better than expected well results. However, the market went against it given an oversupply of Canadian gas. More recently North American gas prices have markedly improved and corporate activity in the Montney has picked up again. Following the Blackspur transaction, Calima has the luxury of time to look to monetise the significant ~200mmboe of discovered resource, which could take the company to the next level. The Montney is one of the most competitive unconventional plays in North America given low cost, high productivity and liquids rich wells combined with attractive fiscal terms. Catalysts: Blackspur well performance; Montney and LNG activity The key catalysts are continued well type-curve outperformance from its current drilling campaign and an acceleration of drilling to bring forward production targets, potentially with the short pay out period being hedged. We expect some small bolt on acquisitions around the existing assets. In the Montney, we expect continued corporate activity and progress of LNG projects to increase the market value of the play. We also see the potential for the company to increase the size of the debt facility and/or increase the term. Valuation: ~170% upside to our risked NAV Our primary valuation methodology is a risked NAV of AUD 2.4c/sh at US$60/bbl Brent. There is also 13% upside to our Core NAV of AUD 1.02c/sh, which only includes the 1P reserves. On a multiple basis, we estimate that Calima is trading on 2022 EV/CFFO of 2.4x. Using the ~C$25mm valuation for the Montney implied pre-Blackspur, sees it trading on just 1.8x EV/CFFO in 2022, versus the peer group on 4.4x. On operational metrics, we see Calima trading on EV/2P reserves of C$4.6/boe and on a flowing barrel basis on $21k per boe/d in 2022. We expect C$24/boe of post-tax cashflow per barrel in 2022. Cash distributions will be driven by market conditions and achieving sustainable production of >5kboe/d, which we expect in 2022.