We have heard much this year of IPO underwriters who have erred on the downside – LinkedIn, the Russian search engine Yandex, Zillow – all provided significant one-day “pops” from the prices the companies set in consultations with their investment bankers.
What are we to make of the converse, then – specifically, of Lone Pine Resources, a Calgary oil-and-gas company that planned to go public in May on the New York Stock Exchange in a range from $18 to $20 (U.S.), but whacked the price down to $13 to get the deal sold?
Still suffering from the odour of that failure and remaining in the shadow of its former parent (still its largest shareholder), or perhaps just flying under the radar screen, the shares have traded lower since, for as little as $10 per share. (It is also lightly traded on the TSX.)
Yet they are creeping up as several analysts announced “buy” ratings with target prices of $15 or more. With its first quarterly earnings release coming up next week as a public company, Lone Pine may emerge from its cloud and get recognition for what analysts say are a collection of prime properties in Western Canada.
“In our view, Lone Pine is still overlooked, which provides an opportunity for investors,” says David Tameron of Wells Fargo Securities LLC, who has an “outperform” rating and a target price range of $16 to $18 per share, versus the current price of just around $12. (It closed Wednesday at $11.80)
Lone Pine has had little time to build up its name, as until recently it was a privately held subsidiary company known as Canadian Forest Oil, a nod to the Denver-based oil and gas concern that still owns more than 80 per cent of the stock.
Forest Oil Corp. intended the spinoff deal to help achieve a separate valuation for its Canadian assets and, ultimately, let it concentrate on its U.S. properties that stretch from that country’s Gulf Coast on through the Midwest and mountain states.
Alas, the valuation Forest Oil had in mind – about $1.9-billion – was too much of a stretch. (One analyst, David Deckelbaum of UBS, had valued the Canadian assets at $900-million at the time of the December spinoff announcement.)
“Once IPOs fall out of bed it's hard to get going again,” says analyst Francis Gaskins, proprietor of IPODesktop.com.
The offering botch is overshadowing Lone Pine’s ownership of what RBC Dominion Securities’ analyst Michael Harvey says is “some of the best real estate in Western Canada,” much of which came from its 2004 acquisition of Wiser Oil.
Lone Pine has 41,000 acres in and near the Evi light oil field in the Peace River Arch in Alberta. Its Slave Point operation there is a “top-tier” asset, Mr. Harvey says, with high production capacity and low costs that make it “one of the most economic in Western Canada.” (Mr. Harvey has a “sector perform” rating but a $15 target price.)
Its primary source of production comes from 129,000 net acres in the Deep Basin that straddles Alberta and British Columbia, including its natural gas Nikanassin operation in about 92,000 net acres in the Narraway/Ojay fields.
All told, natural gas provides about 80 per cent of Lone Pine’s production, but that could slip as the Evi field produces more oil in coming years.
Forest Oil plans to spin off the rest of its stake in Lone Pine to its shareholders later this year. In the meantime, Lone Pine is beefing up its executive team as it starts to go it alone.
“We believe that under the Forest umbrella, these assets were overlooked,” says Mr. Tameron of Wells Fargo. “Due to a variety of factors, the IPO pricing process was not ideal, in our view, but as investors become more familiar with the assets and management posts a few quarters of execution, we believe Lone Pine shares will outperform its exploration and production peer group.”
Lone Pine’s first chance to shine is Aug. 1, when it reports second-quarter earnings. If the company delivers – and continues to, as Mr. Tameron believes, it will never again be as anonymous as it is today.