Bill Newman, CFA 403.750.1297 [email protected] Valentino Pintea, Associate 403.750.7406 [email protected] D e ce m ber 1 8 , 2 0 1 4 IONA ENERGY INC. – BUY INA - TSXV $0.075 TARGET: (from $0.85) $0.40 PROJ. RETURN: 433% VALUATION: 0.25x NAVPS Share Data Basic Shares O/S (mm): Fully Diluted O/S (mm): Market Cap ($mm): Enterprise Value ($mm): Net Debt (W.C.) ($mm)*: Next Reporting Date *As at Q3, 2014 Solution Presented to Prevent Covenant Breach DETAILS – Corporate Update As at September 30, 2014, Iona Energy Inc. (“INA”) had US$96.7 million of cash (including restricted and unrestricted) and was in full compliance with its bond covenants. Today, INA cautioned that it could breach its bonds covenants at some point within the next 12 months due to the following factors: 370.6 390.9 27.8 228.2 200.4 April 2015 $0.80 $0.40 $0.20 Apr-14 Aug-14 Steep decline in international crude oil prices • Continuous interruptions of production at Huntington field • Delaying Orlando first oil production to 2016 from 2015 Management has suggested refinancing the bonds in combination with an acquisition as one solution to prevent a default. The company has attempted to reduce costs and reposition capital for Orlando’s development in an effort to improve its financial situation since September 1, 2014. Currently the company is in discussions with its bondholders to increase its financial flexibility. $0.60 Jan-14 • IMPACT – Negative. Increased Risk Factors In Stock $0.00 Dec-14 We are confident management will be able to negotiate and refinance its bonds however it could be some time before the company is able to implement an acquisition and production diversification strategy in today’s lower oil price environment and thereby this introduces more risk into the stock. Corporate Profile Iona Energy Inc. is an exploration and production company with operations exclusively focused in the UK North Sea. Management and directors have extensive international oil and gas experience, much of which has been focused on North Sea exploration ACTION – BUY. Lowering Target Although INA continues to seek diversifying production through new acquisitions, today’s low oil price environment has made the time-frame for this to occur unknown. The potential for default also introduces further risk into the stock however this is not to be confused with liquidity risk as the company has ample cash. We maintain our BUY recommendation and lower our target price to $0.40 from $0.85 target price, equivalent to our new 0.25x risked NAV multiple (previously 0.50x) based on a lower oil price environment and increased risk factors in the stock. Upcoming Events - Huntington production ramp up (Dec./ 2014) - Refinancing bonds with an acquisition of a producing asset (tbd) - Orlando First Production (late 2016) FYE Dec 31 2013A 1,448 Q1/14A Q2/14A Q3/14A Q4/14E 3,823 2,514 2,528 878 2014E 2,434 Q1/15E Q2/15E Q3/15E Q4/15E 3,598 3,508 3,420 3,335 2015E 3,465 Oils & Liquids bbl/d Natural Gas mmcf/d 3.3 2.0 1.5 1.2 1.0 1.4 3.4 2.6 2.6 2.5 2.8 Boe/d* 6:1 2,002 4,155 2,759 2,736 1,042 2,674 4,169 3,946 3,848 3,751 3,928 Production Growth % 69% 91% 90% 92% 82% 90% 86% 89% 89% 89% 88% Cash Flow US$mm 31.3 27.1 3.3 (19.3) (1.9) 17.8 13.8 12.7 12.0 11.4 49.9 Cash Flow/FD Share $/share 0.09 0.07 0.01 (0.05) (0.01) 0.05 0.04 0.03 0.03 0.03 0.14 EV/DACF multiple 3.9x 1.5x 4.6x na 9.3x 4.5x 2.4x 2.5x 2.7x 3.0x 2.9x *Includes 2.55% royalty This report has been created by analysts who are employed by Mackie Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. www.mackieresearch.com Intraday RESEARCH ALERT – Quarterly Results – IONA ENERGY INC. Page 2 BOND COVENANTS On September 27, 2103, INA issued U$275 million of senior secured bonds with a 9.5% coupon payable semi-annually. As at September 30, 2014 INA was in compliance with all covenants (Figure 1). Management has stated there is the potential to breach the bond covenants within the next 12 months due to falling oil prices, continuous production disruptions at Huntington field and delaying Orlando first oil production to 2016 from 2015. The company would like to refinance the bonds in combination with an acquisition as one solution to prevent default on the bonds. Figure 1: Debt Covenants Covenant Liquidity - Cash and cash equivalents of at least $30 million Capital Employed Ratio - Equity/(Equity + Debt) Restricted Capital Employed Ratio - Restricted Equity/Restricted Equity + Debt) Leverage Ratio - Debt/ Trailing 12 months EBITDA Ratio > $30 mm > 40% > 40% < 3.0x Sept 30th $89.3 mm 48% 48% 2.27x Source: Company presentation, Mackie Research Bond Maturities: The bonds mature on September 30, 2018 and will be repaid at 15% of the face value (US$275 million) every six months with a 25% final payment at maturity. The first repayment is scheduled for March 2016 (Figure 2). Figure 2: Bond Repayment Schedule Payment Date March 2016 September 2016 March 2017 September 2017 March 2018 September 2018 Total Source: Company presentation, Mackie Research $ $ $ $ $ $ $ Intallment 41,250,000 41,250,000 41,250,000 41,250,000 41,250,000 68,750,000 275,000,000 www.mackieresearch.com Intraday RESEARCH ALERT – Quarterly Results – IONA ENERGY INC. Page 3 Figure 3: Detailed History and Forecast Iona Energy Inc. INA Share Basic Shares (mm): Diluted Shares (mm): 27.8 370.6 Fully Diluted (mm): 390.9 Production Oil & Liquids bbl/d Natural Gas mmcf/d 6:1 Boe/d 1 Percentage Oil % Cash Flow & Earnings * Cash Flow US$ m m Cash Flow /FD Share $/share Earnings/FD Share $/share $/Barrel of Oil Equivalent (US$) * Revenue $/boe Operating Costs $/boe Cash Flow $/boe Valuation Metrics (C$) FD Cash Flow Multiple EV/DACF Multiple EV/Production C$/mboe/d EV/boe reserves C$/boe Com m odity Price Brent US$/bbl Corporate Oil & Liquids* US$/bbl Corporate Natural Gas* US$/mmbtu Exchange Rate US$ per C$ Capex and Capital Structure Capex * US$ mm Capex/Cash Flow % Weighted Average Basic mm Dilutive Shares mm Market Cap C$ mm Enterprise Value C$ mm Year-end Net Debt (WC) C$ mm Net Debt/Cash Flow NAV, Reseves and Concessions Market Value Market Cap. ($ mm): $ 27.8 Enterprise Value ($ mm): $ 228.2 Net Debt (W.C) ($ mm): $ Target Price Target Price: $0.40 Return: 433% 52 Week Low : Risked NAV: 0.25x $0.06 2012A 1.9 313 0% 2012A ($6.6) ($0.0) ($0.0) 2012A 54.09 22.23 na 2012A na 730 6.34 2012A 112.73 na 9.05 1.00 2013A 1,448 3.3 2,002 72% 2013A $31.3 $0.09 $0.08 2013A 100.70 25.85 48.15 2013A 0.9x 3.9x 114 6.71 2013A 108.56 108.35 10.07 1.00 Q1/14A 3,823 2.0 4,155 92% Q1/14A $27.1 $0.07 ($0.00) Q1/14A 110.13 20.11 83.68 Q1/14A 0.2x 1.5x 55 Q2/14A 2,514 1.5 2,759 91% Q2/14A $3.3 $0.01 ($0.08) Q2/14A 124.75 51.11 15.40 Q2/14A 1.9x 4.6x 83 Q3/14A 2,528 1.2 2,736 92% Q3/14A ($19.3) ($0.05) ($0.12) Q3/14A 103.16 38.51 (88.77) Q3/14A na na 83 Q4/14E 878 1.0 1,042 84% Q4/14E ($1.9) ($0.01) ($0.02) Q4/14E 71.40 39.00 (22.50) Q4/14E na 9.3x 219 2014E 2,434 1.4 2,674 91% 2014E $17.8 $0.05 ($0.21) 2014E 107.91 34.63 21.06 2014E 1.4x 4.5x 85 2015E 3,465 2.8 3,928 88% 2015E $49.9 $0.14 ($0.04) 2015E 72.85 26.99 40.63 2015E 0.5x 2.9x 58 Q1/14A 108.10 107.87 12.04 0.91 Q2/14A 109.76 109.10 7.77 0.92 Q3/14A 103.46 86.20 7.84 0.92 Q4/14E 85.14 75.14 8.98 0.91 2014E 101.62 94.58 9.16 0.91 2015E 85.00 75.00 9.46 0.89 2012A 143.1 na 273.6 279.1 23.9 58.7 34.7 na 2013A 269.8 861% 360.8 363.1 27.5 210.9 183.4 5.9x Q1/14A 3.2 0.1 366.8 366.8 27.5 220.3 192.7 1.6x Q2/14A 0.4 0.1 366.8 366.8 27.5 219.7 192.1 13.2x Q3/14A 6.7 (0.3) 368.1 368.1 27.8 223.9 196.1 -2.3x Q4/14E 10.0 (5.3) 368.1 368.1 27.8 239.1 211.3 -25.5x 2014E 20.3 114% 367.4 368.1 27.7 238.1 210.4 10.8x 2015E 65.0 130% 366.7 368.1 27.5 259.6 232.1 4.2x Net Asset Value Reserves (P + P)* Net Debt Other Liabilities Net Asset Value (Basic) Dilution Core NAV/FD Share Price to core NAV Risked Exploration (C$) Risked NAV/FD share (C$) Price to risked NAV (multiple) 200.4 Stock Price Close: $0.08 52 Week High: $0.68 C$mm C$/share 772.9 $2.09 200.4 $0.54 0.0 $0.00 572.5 $1.54 0.0 $0.00 572.5 $1.54 0.05x 32.9 $0.09 572.5 $1.54 1.6 0.05x Reserve Estim ate (Decem ber 31, 2013) (mboe) Proven 55% 18,852 Probable 45% 15,128 P+P 33,980 Notes: * INA changed presentation currency to US$ from C$ starting Q4/13 1. Includes 2.55% royalty Source: Company reports, Mackie Research Capital Reserve Life Index Production 2013 2014 25.8 19.3 46.5 34.8 Orlando West Wick Kells Trent & Tyne Huntington Estim ated 2P Reserves By Field mmbbls bcf (mboe) 11,530 0.0 11,530 9,710 0.0 9,710 3,150 20.7 6,592 19 21.4 3,590 4,140 2.6 4,580 28,549 44.7 36,002 As of date xxxxxxxxxxxxxxxx www.mackieresearch.com Intraday RESEARCH ALERT – Quarterly Results – IONA ENERGY INC. Page 4 RISKS TO TARGET Funding risk: A portion of Iona’s funding will be derived from cash flow from the Huntington field. Production disruptions or a sustained low oil prices could limit Iona’s ability to implement its business plan. Operational risk: Iona’s primary operational risk is the potential for cost overruns and delays associated with the drilling and tie-in of its development plays. Default risk: Iona could breach its bond covenants leading to a default due to market and operational factors and if it cannot renegotiate its bond agreement. RELEVANT DISCLOSURES APPLICABLE TO: IONA ENERGY INC. 1. Within the last 3 years, Mackie Research Capital Corporation has managed or co-managed an offering of securities by the subject issuer. 2. Within the last 3 years, Mackie Research Capital Corporation has received compensation for investment banking and related services from the subject issuer. ANALYST CERTIFICATION Each analyst of Mackie Research Capital Corporation whose name appears in this report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the analyst’s personal views and (ii) no part of the research analyst’s compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research report. 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