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Stock to Watch: Bellatrix Exploration attractive to South Korean partner

A pump jack in the Cardium oil play of Alberta

Bellatrix Exploration Ltd.

Thursday's close: $5.18 a share, up 1 cent

52-week trading range: $2.43 to $5.67 a share

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Annual dividend: none

Analysts' ratings: The are 11 buys, one hold and no sells, according to Bloomberg data. Target prices range from $6.25 a share from CIBC World Markets analyst Arthur Grayfer, to $9 a share from Casimir Capital analyst Ryan Galloway.

Recent history: Shares of the intermediate oil and gas companies are virtually flat over the past year. Depressed natural gas prices have hurt the stock of Bellatrix, which is more than 65 per cent weighted to this commodity. Bellatrix was formerly known as True Energy Trust before it was converted into a corporation in late 2009 under a new management team led by its chief executive officer Ray Smith. Most of Bellatrix's assets are in the Cardium light oil and gas play in northwest Alberta. Last month, it announced a deal with an unnamed South Korean partner who would contribute half of the cash towards a $300-million joint venture. The deal is set to close in April. Bellatrix's shares have jumped about 26 per cent since then.

Manager insight: Bellatrix's transaction in the gas-rich Ferrier region of the Cardium play is a "good deal," said Stephen Andersons, a portfolio manager with Venator Capital Management Ltd. The key is that it is "third-party validation" of its property, and will help ramp up production, he said.

Under the terms of the transaction, the South Korean partner will contribute $150-million towards an 83-well program. It will earn a 33 per cent interest plus an 8 per cent return on top of that. When it recoups its total investment or seven years have passed, whichever comes first, the stake of the partner will drop to 20 per cent.

A low-cost energy producer, Bellatrix is also a compelling story because of its strong management team that has met or exceeded every target that it has set, said Mr. Andersons, who has owned its stock for more than two years. "They have access to capital because they are generating a lot of cash flow from their existing operations...Most of their drilling program is covered by internally generated cash, and I expect them to be able to draw against their bank lines for the rest of it...The point there is that I don't expect them to issuing stock anytime soon, which could be dilutive."

Bellatrix, which now has a New York listing, is a relatively cheap stock compared to its peers, and could hit $7 a share within a year based on recent developments, he said. "That would have it just trading in line with its peers, and there is potentially more upside beyond that."

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