Results meet expectations, new drilling may be accelerating growth

Production slows, expenditures rise, and gas prices drop

Results below elevated expectations but production growth justifies dividend initiation

Share Buyback Logical Next Use of Cash

Michael Heim

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Energy

Oil & Gas

InPlay Oil

<p><strong>InPlay Oil reported fourth quarter and 2022 operating results that demonstrate strong growth, generally meeting expectations.</strong>&nbsp;Annual production volumes came in at the lower end of 2022 guidance of 9,100-9,200 boe/d. Downtime at a third-party gas processing plant slowed production in the fourth quarter as did cold weather delays to bringing newly drilled wells on line. Still, production levels show an impressive increase over last year&#8217;s numbers. Higher production levels for InPlay and others in the area may be beginning to show signs of affecting takeaway capacity. Management reports that approximately 4.5 mmcf/d (15-20% of InPlay&#8217;s gas production and 5-10% of overall production) was curtailed by a third party natural gas facility beginning February 15th. Management downplayed the impact noting that it has been shifting production towards oil-heavy wells, even shutting in some gas-heavy wells. We would note that realized prices in the quarter and year reflect a widening discount to benchmark prices, which may also be a sign of increased supply in the area. Our models reflect a wider basin differential going forward. On a positive note, natural gas prices, which often collapse in the summer as they did again this past summer, rebounded nicely in the fourth quarter. We expect natural gas prices to remain seasonal.</p>
<table border="1" style="border-collapse: collapse;width: 713px;height: 90px">
<tbody>
<tr style="height: 18px">
<td style="width: 214px;height: 18px">
         </td>
<td style="width: 61px;height: 18px">2022-4Q</td>
<td style="width: 59px;height: 18px">2021-4Q</td>
<td style="width: 64px;height: 18px">2022-3Q</td>
<td style="width: 73px;height: 18px">Noble Est.</td>
<td style="width: 42px;height: 18px">
         </td>
<td style="width: 58px;height: 18px">2022</td>
<td style="width: 67px;height: 18px">2021</td>
<td style="width: 75px;height: 18px">Noble Est.</td>
</tr>
<tr style="height: 18px">
<td style="width: 214px;height: 18px">Production (BOE/d)</td>
<td style="width: 61px;height: 18px">9,623</td>
<td style="width: 59px;height: 18px">6,687</td>
<td style="width: 64px;height: 18px">9,495</td>
<td style="width: 73px;height: 18px">10,052</td>
<td style="width: 42px;height: 18px">
         </td>
<td style="width: 58px;height: 18px">9,105</td>
<td style="width: 67px;height: 18px">5,768</td>
<td style="width: 75px;height: 18px">9,162</td>
</tr>
<tr style="height: 18px">
<td style="width: 214px;height: 18px">Realized Oil Price (C$/BOE)</td>
<td style="width: 61px;height: 18px">90.21</td>
<td style="width: 59px;height: 18px">79.83</td>
<td style="width: 64px;height: 18px">115.35</td>
<td style="width: 73px;height: 18px">103.33</td>
<td style="width: 42px;height: 18px">
         </td>
<td style="width: 58px;height: 18px">102.26</td>
<td style="width: 67px;height: 18px">70.08</td>
<td style="width: 75px;height: 18px">108.23</td>
</tr>
<tr style="height: 18px">
<td style="width: 214px;height: 18px">Realized Gas Price (C$/mmcf)</td>
<td style="width: 61px;height: 18px">5.63</td>
<td style="width: 59px;height: 18px">5.04</td>
<td style="width: 64px;height: 18px">4.60</td>
<td style="width: 73px;height: 18px">6.00</td>
<td style="width: 42px;height: 18px">
         </td>
<td style="width: 58px;height: 18px">5.74</td>
<td style="width: 67px;height: 18px">4.01</td>
<td style="width: 75px;height: 18px">5.85</td>
</tr>
<tr style="height: 18px">
<td style="width: 214px;height: 18px">
         </td>
<td style="width: 61px;height: 18px">
         </td>
<td style="width: 59px;height: 18px">
         </td>
<td style="width: 64px;height: 18px">
         </td>
<td style="width: 73px;height: 18px">
         </td>
<td style="width: 42px;height: 18px">
         </td>
<td style="width: 58px;height: 18px">
         </td>
<td style="width: 67px;height: 18px">
         </td>
<td style="width: 75px;height: 18px">
         </td>
</tr>
</tbody>
</table>
<p><strong>Drilling is accelerating and creating higher producing wells.</strong> The company drilled 17.5 net wells in 2022 surpassing our 15 well estimate. Drilling included two of four wells brought on line in the first quarter of 2023. Management reports that initial production rates for these four wells were &#8220;significantly above internal expectations&#8221; even as high back pressure in the gathering line curtailed production. InPlay has been shifting towards longer horizontal laterals. While the longer laterals has added to drilling costs, it would appear that increased production flows justify the costs. The company is also upgrading two gas facilities in the Willesden Green area which should help alleviate pressure issues. Bottom line: management believes the steps it is taking, combined with favorable drilling results, will offset the impact of production curtailment. Management reiterated 2023 production guidance of 9,500-10,000 boe/d. We are at the upper end of guidance and are making no changes to our projections. However, we are shifting some production away from the first quarter and also shifting production away from gas to oil.</p>
<p> <strong>Cash flow generation is growing and management is responding by returning cash to shareholders.</strong> With high netbacks (realized prices less royalties and operating costs) and higher production volumes, cash flow has risen dramatically. Adjusted Fund Flow rose 76% year over year in the most recent quarter. Higher cash flow has allowed the company to pursue a multi-dimensional approach to increasing shareholder value. First, it has initiated a C$0.18 dividend (roughly 7% yield). Management believes this dividend is sustainable even if oil prices were to fall to US$55/bbl. Future increases are certainly likely if oil price hold at levels near US$70/bbl. Second, the company has moved to pay down debt. This has been done even as the company has increased its line of credit, giving it increased financing power and flexibility. Finally, the company has increased its drilling and infrastructure development program. As we have pointed out in the past, the payback on drilling wells is less than twelve months, making the return on every dollar spent very high.</p>
<table border="1" style="border-collapse: collapse;width: 763px;height: 110px">
<tbody>
<tr style="height: 18px">
<td style="width: 283px;height: 18px">
         </td>
<td style="width: 73px;height: 18px">2022-4Q</td>
<td style="width: 65px;height: 18px">2021-4Q</td>
<td style="width: 78px;height: 18px">Noble Est.</td>
<td style="width: 47px;height: 18px">
         </td>
<td style="width: 49px;height: 18px">2022</td>
<td style="width: 55px;height: 18px">2021</td>
<td style="width: 113px;height: 18px">Noble Est</td>
</tr>
<tr style="height: 18px">
<td style="width: 283px;height: 18px">Operating Netbacks (C$/boe)</td>
<td style="width: 73px;height: 18px">38.10</td>
<td style="width: 65px;height: 18px">33.76</td>
<td style="width: 78px;height: 18px">51.66</td>
<td style="width: 47px;height: 18px">
         </td>
<td style="width: 49px;height: 18px">43.93</td>
<td style="width: 55px;height: 18px">28.43</td>
<td style="width: 113px;height: 18px">49.54</td>
</tr>
<tr style="height: 18px">
<td style="width: 283px;height: 18px">Adjusted Fund Flow (C$1000)</td>
<td style="width: 73px;height: 18px">30,271</td>
<td style="width: 65px;height: 18px">17,149</td>
<td style="width: 78px;height: 18px">34,993</td>
<td style="width: 47px;height: 18px">
         </td>
<td style="width: 49px;height: 18px">130,805</td>
<td style="width: 55px;height: 18px">47,028</td>
<td style="width: 113px;height: 18px">129,487</td>
</tr>
<tr style="height: 18px">
<td style="width: 283px;height: 18px">
         </td>
<td style="width: 73px;height: 18px">
         </td>
<td style="width: 65px;height: 18px">
         </td>
<td style="width: 78px;height: 18px">
         </td>
<td style="width: 47px;height: 18px">
         </td>
<td style="width: 49px;height: 18px">
         </td>
<td style="width: 55px;height: 18px">
         </td>
<td style="width: 113px;height: 18px">
         </td>
</tr>
<tr style="height: 20px">
<td style="width: 283px;height: 20px">Dividend Rate (C$/sh.)</td>
<td style="width: 73px;height: 20px">0.045</td>
<td style="width: 65px;height: 20px">0.00</td>
<td style="width: 78px;height: 20px">0.045</td>
<td style="width: 47px;height: 20px">
         </td>
<td style="width: 49px;height: 20px">0.18</td>
<td style="width: 55px;height: 20px">0.00</td>
<td style="width: 113px;height: 20px">0.18</td>
</tr>
<tr style="height: 18px">
<td style="width: 283px;height: 18px">Debt, net ($C)</td>
<td style="width: 73px;height: 18px">32.9</td>
<td style="width: 65px;height: 18px">80.2</td>
<td style="width: 78px;height: 18px">38.6</td>
<td style="width: 47px;height: 18px">
         </td>
<td style="width: 49px;height: 18px">32.9</td>
<td style="width: 55px;height: 18px">79.1</td>
<td style="width: 113px;height: 18px">38.6</td>
</tr>
<tr>
<td style="width: 283px">Capital Expenditures</td>
<td style="width: 73px">13,647</td>
<td style="width: 65px">6,024</td>
<td style="width: 78px">25,000</td>
<td style="width: 47px">
         </td>
<td style="width: 49px">77,603</td>
<td style="width: 55px">33,434</td>
<td style="width: 113px">78,566</td>
</tr>
<tr>
<td style="width: 283px">
         </td>
<td style="width: 73px">
         </td>
<td style="width: 65px">
         </td>
<td style="width: 78px">
         </td>
<td style="width: 47px">
         </td>
<td style="width: 49px">
         </td>
<td style="width: 55px">
         </td>
<td style="width: 113px">
         </td>
</tr>
</tbody>
</table>
<p><strong><br /></strong></p>
<p><strong>Increased drilling and lower net debt is growing the value of the company.</strong>&nbsp;Along with financial results, the company released updated reserve estimates. As you might expect by the company&#8217;s successful drilling program, proved reserves continue to grow, rising 20% year over year. InPlay replaced 153% of production at a Finding and Development cost of only $5.86/boe. As the company adds reserves at a cost well below the value of reserves, the overall value of its assets increases. In fact, the present value (discounted back at a 10% rate) of all proved reserves less debt equates to $7.20 per share. This represents a 46% increase over the PV10 value per share at the end of 2021 as reported at this time last year. The improvement reflect both increased asset value and reduced net debt levels. Meanwhile, IPOOF stock price has decreased 32% over the last twelve months to $1.77 from $2.59. We believe the value of InPlay&#8217;s management team and its asset base is becoming clear, even if it is not being reflected in the stock&#8217;s current price. We reiterate our outperform rating and $6 price target on the shares of IPOOF (C$7.50 on the shares of IPO.to).</p>
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InPlay Oil (IPOOF)

Results meet expectations, new drilling may be accelerating growth

Fundamental Analysis:

Rating: Log in to view

Results meet expectations, new drilling may be accelerating growth (IPOOF)

Production slows, expenditures rise, and gas prices drop (IPOOF)

Results below elevated expectations but production growth justifies dividend initiation (IPOOF)

Share Buyback Logical Next Use of Cash (IPOOF)

Inbox Intel from Channelchek.