Connacher's management needs to focus on three things to successfully navigate the treacherous waters they are in.
First and foremost, they have to successfully manage production at their 2 SAGD facilities and make money at it with $75 oil. They have to get their SOR (steam oil ratio) down to 3.0 or below. It seems the industry's best SAGD operations boast a SOR of 2.5. Some of the slides (21 through 24) of their most recent Investor Presentation focuses on this issue. Between the 2 projects they have steam capacity of 57,000 BPD (27K for GD and 30K for Algar). A SOR of 3.0 would produce 19,000 BPD of bitumen. At $75 oil & a 95 cent CAD they should genarate approx 50 million cash flow / qtr, even after allowing for all interest costs on their debt. If they can put together 2 or 3 quarters of that type of performance then the market will reward them with a higher share price. Given the precarious state of the world economy I think oil prices will remain in the $60 to $90 range for a number of years. OPEC seems to have the will keep the oil price in that range.
Secondly, they have to continue to increase their reserves. This gives them the ability to obtain financing at better rates.
Thirdly, they have to find an attractive way to finance the 600 MM needed to expand production to 44,000 BPD. They have about 1.5 to 2 years to get their act together before figuring this out. I think the best way to do this is to focus on items 1 & 2 above to reduce their risk profile to the point where they can refinance their current debt load at a much more reasonalbe rate - say 6 %. Also I would do the expansion in two phases (12,000 pdd each) to reduce the financial and operational risks. At some point in the next few years they need to establish a long-term term (say 25 years) low interest rate loan to match the revenue generationg stream of their asset base.
