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Hannam & Partners - 5 August 2021



Montney: large resource with exposure to improving Canadian gas pricing

Montney: large resource with exposure to improving Canadian gas pricing In this note we focus on Calima’s Montney position, which has moved out of the limelight following the Blackspur acquisition, despite a much improved outlook for the assets. 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, new Canadian LNG export projects are gathering pace 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. 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.

Strong corporate activity consolidating positions in the basin

Strong corporate activity consolidating positions in the basin Calima’s closest comparable in the Northern Montney with neighbouring acreage, Saguaro, sold 50% interest of its production and facilities to Tourmaline for ~C$205mm (9,000 boe/d, 25% condensate/NGL’s). Tourmaline has made several acquisitions in the Northern Montney area over the last year, demonstrating its confidence in the regional play. Arc Resources and Seven Generations merged in April 2021 in a C$8.1bn deal and there were significant acquisitions from ConocoPhillips and Canadian Natural Resources of Montney assets in 2020. Calima (+20% YTD) has lagged the total shareholder return performance of the key Montney players this year, such as Tourmaline (+105%), Arc Resources (+63%) and Storm Resources (+70%), for no fundamental reason, and as a result we see strong value creation potential from its Montney assets.

Bullish Canadian gas prices and LNG projects moving forwards

North American and global gas prices have been strong this year and we see the fundamentals keeping pricing strong over the coming years. In particular for Canada and the Montney, there are several LNG plants planned to come on line this decade, which will stimulate further demand for gas and support prices. Notably, two Canadian LNG export projects recently made progress towards FID with Pembina Pipeline Corp taking a stake in Cedar LNG and various upstream producers coming together to back Ksi Lisims FLNG.

Catalysts: corporate activity, peer performance and well results

In the Montney, we believe continued corporate activity and progress of LNG projects will increase the market value of the play. We expect the performance of the other listed Montney-focused stocks (e.g., Tourmaline, Storm Resources and Arc Resources) and drilling results from nearby acreage (e.g. Tourmaline) to be catalysts for Calima. We see the potential for a transaction on Calima’s assets over the coming months as it looks to unlock value through joint ventures, farm-outs or asset disposals.

Valuation and investment case: ~155% upside to our risked NAV

Calima has near-term oil price exposure from the Blackspur assets and longer-term gearing into the energy transition through its Montney position. The company offers a combination of value, growth and shareholder return potential. It offers organic growth through the drill-bit with >20 years reserve life. It has some of the lowest cost (<US$15/boe capex plus opex) and highest return drilling locations (some >500% IRR at current prices) available globally. Our primary valuation methodology is a risked NAV of AUD 2.55c/sh at US$60/bbl Brent from 2022. There is also 5% upside to our Core NAV of AUD 1.05c/sh, which only includes the 1P reserves. On a multiple basis, we estimate that Calima is trading on ‘22 EV/CFFO of 2.7x. 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 3.5x. On operational metrics, we see Calima trading on EV/2P reserves of C$5/boe and on a flowing barrel basis on $24k per boe/d in 2022. Cash distributions will be driven by market conditions and achieving sustainable production of >5kboe/d, which we expect in 2022.
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