Majors’ appetite for shale assets boosts our target
We raise our target price for QEC to NOK 26 (4.73 CAD) on the back of the recent uptick in US shale gas transactions, as well as the major’s growing appetite for unconventional oil and gas assets. The next share price trigger on the horizon is the 1Q10 announcement of Lowlands horizontal drilling results.

• Recent transactions drive target price increase. The past few weeks have seen several major shale gas deals in the US, including ExxonMobil’s USD 41bn acquisition of XTO (USD 10,700/acre) and Total’s USD 2.25bn acquisition of Chesapeake’s Barnett acreage (USD 7,500/acre). These transactions confirm the liquidity of North American unconventional gas assets and show that the large caps are starting to move into the shale market. We raise our target price to NOK 26 (20) on the back of these deals. Although the Questerre share price has nearly tripled, going from NOK 6.9 to 18.5 since we initiated coverage in July 2009, we advise energy-focused investors to keep buying the shares until the next trigger, i.e. the release of the horizontal well test results in 1Q10.

• Horizontal well testing results coming up. Questerre is currently conducting horizontal well testing at the Lowlands field which should yield valuable data. Historically, stabilized initial flow rates have shown a strong correlation with the ultimate recoverable reserves. We expect an announcement of the St. Edouard horizontal well test results to be forthcoming in 1Q10. The company’s Utica wells have tested rates of between 300-2,600 mcf/day. Our base case valuation assumes an initial flow rate of 2,000 mcf/day.

• Looking for a 2.0-2.5 mmcf/day flow rate. Flow rates from different wells can vary significantly and, thus, the main data point of interest should be the average production rate from a number of wells, rather than from just a single well. For the next well we expect to see an initial flow rate of 2.0-2.5 mmcf/day, based on 10 fracs.

• Attractive valuation, conservative assumptions. Our SOTP valuation indicates an unrisked value for Questerre of NOK 81 per share, which conservatively assumes a long-term gas price of USD 7.0/mcf.

• Reiterating Buy and raising target to NOK 26/share. We stick to our Buy recommendation but raise our 12-month target price of NOK 26/share.

Conclusion

Another significant shale gas transaction adding confidence to our valuation

What's new?

Chesapeake sells 25% of its Barnett Shale asset to Total for 2.25 USDbn

Our analysis
1) Another supportive data point. Based on the total consideration of 2.25 USDbn (800 USDm in cash and 1.45 USDbn through funding parts of Chesapeake's capex), Total is effectively paying 5.7 USD per BOE (undiscounted). This consists of 0.75 Tcf of proved reserves and an additional 1.6 Tcf of unrisked unproved reserves. Questerre is currently trading at 0.8 USD per BOE and our NAV of 32 NOK per share implies 1.6 USD per BOE. Being the most mature shale gas play in the US, assets in Barnett should be valued at a considerable premium to shale gas plays like the Utica in our view. For Questerre to trade at a similar multiple the share price must reach 119 NOK. (NB)

2) Less relevant than the ExxonMobil/XTO Energy deal. Based on the maturity of the Barnett shale, we believe the read-across from this transaction is less relevant than the ExxonMobil/XTO Energy deal. It is however important to notice that another major player is increasing its shale gas exposure and that the asset market for shale gas plays is picking up and offering good value compared to current valuation of juniors like Questerre.

3) Major data point coming up. For Questerre, the upcoming test results from its Utica horizontal wells will be of huge importance for the implied probability of success and future pace of drilling. Flow rate from the first of the two ongoing wells is expected during February.