(Note: Dollars amounts in the Genesis Exploration recommendation are Canadian. Recently, US$1 equaled C$1.46) Genesis has achieved exceptional production and reserve growth from its successful drilling and exploitation programs, while maintaining below-average finding and operating costs, says Wayne W. Andrews, E&P analyst for Raymond James & Co. in Houston. "We are initiating coverage of Genesis with a Buy rating and a 12-month target price of $12 per share." Incorporated in 1992, Genesis is a Calgary-based junior oil and gas company focused on finding low-cost natural gas, gas liquids and crude oil. The company operates primarily in four core areas of the Canadian Western Sedimentary Basin-the Grouard, Sturgeon Lake and West Central areas of Alberta, and in Southeast Saskatchewan. As of year-end 1998, its gas-weighted reserves were more than 350 billion cu. ft. equivalent. Andrews cites several factors that prompt his Buy recommendation on GEX. First, during the five-year period between 1994 and 1998, Genesis increased its yearly production from 426 million cu. ft. equivalent to 17.9 Bcfe, which is a compound annual growth rate of 155%, he says. "Meanwhile, it increased its reserves from 6.6 Bcfe to 353.8 Bcfe, which is a compound annual growth rate of 1,028%." Furthermore, the company replaced its reserves during that period at an average cost of 67 cents per Mcfe-substantially below an average $1.22 per Mcfe for its Canadian peer group and an average $1.38 per Mcfe for its U.S. peer group. Second, Genesis has a large inventory of exploration and growth opportunities. The deeper formations in Canada's Western Sedimentary Basin-one of the few remaining underexplored regions in North America-contain prolific reserve potential, ranging in size from 5- to 200 Bcfe per well, and gas production rates up to 60 million cu. ft. per day, says Andrews. "With more than 350,000 net undeveloped acres in the deep-formation areas of the basin, a sizeable inventory of drillable locations, and demonstrated drilling success, Genesis should be able to continue its exceptional reserve and production growth for many years." GEX also exercises operational control over its projects, creates local dominance in its core areas, and has a strong balance sheet, compelling valuation, and strategic focus on natural gas, the analyst adds. "With natural gas comprising 76% of production and 73% of year-end 1998 proved reserves, Genesis is positioned to benefit substantially from the bullish outlook for Canadian natural gas." Turning to valuation, GEX is trading at 3.7 times Andrews' 2000 cash-flow-per-share estimate versus cash flow multiples of 3.5 and 3.3, respectively, for its U.S. and Canadian peers. "However, few of its peers have Genesis' operational expertise and local dominance in their core areas. Therefore, GEX should trade at a premium to its peer group and closer to its historical average multiple of 6.6 times forward cash flow." Note: Analysis took place 12-14-99 when GEX closed at $7.30 per share and was reaffirmed 2-24 when at $8.35. Currently, some 37.2 million shares are outstanding. The recent 52-week price range was $11.35-$4.10.
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