Guide Exploration: Solid Execution, Bright Future

| About: Galleon Energy (GLNYF)

Guide Exploration (OTC:GLNYF) reported Q4 and FY 2011 results on the afternoon of March 16, 2012. Since my previous article on Guide Exploration on October 24, 2011, the stock overall has gone down a bit, mostly triggered by its announced acquisition of natural gas properties (Boyer) and the depressed price of natural gas.

I believe the current extremely negative sentiment on the stock is unjustified, and Guide's management's philosophy of focusing development on the strong underlying commodity (crude oil) while acquiring assets of another underlying commodity at a cyclical low (natural gas) is a sound strategy. A combination of experienced management, a major shareholder (Sprott) with an excellent track record, and dirt cheap valuation will make Guide a very attractive investment at the current price.

Full-Year Results

For FY2011, revenue totaled $188.2 million with funds flow of $98.6 million on average daily production of 4,070 barrels per day of crude oil and NGLs and 47.8 Mmcf/d of natural gas (34% Oil/NGLs weighting). Guide drilled 54 (49.5 net) wells resulting in 43 (38.9 net) oil wells and 11 (10.6 net) natural gas wells, for a success rate of 100% during the year.

At year end 2011, Guide's proved and probable reserves totaled 38.1 million BOE including total proved reserves of 23.4 million BOE. Guide's proved reserves are weighted 38.7% to oil and natural gas liquids. Based on the net present value of future net revenue attributable to proved and probable reserves (at a 10% discount rate) as at December 31, 2011 as evaluated by Sproule and using year end debt and estimated undeveloped land value at an average of $95 per acre, the net asset value of Guide at year end 2011 was $520 million or $5.62 per share.

Boyer Acquisition

On January 4, 2012, Guide announced an agreement to purchase natural gas properties for $61.5 million. This announcement was received very negatively by the market, evidenced by the continued decline of the stock price of Guide from C$3.33 just prior to the announced acquisition to C$2.42 as of March 16, 2012. The properties are producing approximately 20 MMcf/d of sweet natural gas (3,330 BOE/d). The acquisition is funded through a combination of a bought deal equity financing of $36.6 million and Guide's existing credit facilities.

Management believed that it was an opportunistic acquisition while the price of natural gas is very low, and it was also a way of utilizing existing 2012 natural gas hedges. My view on natural gas is that if it continues to be this cheap (continued excess production due to advanced technology), there will be corresponding development or innovation on the demand side to make the equation more balanced. I believe China (Sinopec)'s acquisition of Daylight Energy, which is a company very similar to Guide (explained in my previous article), reflects China's potential interest in Canadian natural gas, and the U.S. could potentially find ways to utilize more natural gas to reduce dependence on oil.

Management's Development Focus is Still Oil

Management has indicated after the Boyer acquisition that they are still extremely focused on developing oil since it is the strong commodity right now. Acquiring the natural gas properties only follows management's philosophy of acquiring assets where the corresponding commodity is believed to be at a cyclical low. This point has been largely ignored by the market, and there stands a significant near-term upside for the share price if Guide can deliver on their operational strategy of successfully focusing on oil development.

So the question to ask is if the current management can deliver on their promises. As mentioned in my previous article, the previous management team of Guide had over-promised and under-delivered after 2008 which led to the market being very skeptical of Guide since then, and I also wrote about the strong credentials of the Guide's current management team in my previous article. Since present management took over August of last year, they have consistently delivered on their production targets. For February 2012, including the Boyer acquisition, average field estimated sales production was 5,350 barrels per day of crude oil and natural gas liquids (compared to 4,070 barrels per day of crude oil and NGL for FY2011) and 63 Mmcf/d of natural gas.

For 2012, Guide is guiding to production of between 15,500 to 16,300 BOE/d as follows: Oil: 5,300 - 5,500 Bbl/d, NGLs: 400 - 450 Bbl/d, Gas: 59 - 62 Mmcf/d. Strong growth in oil production (40% year over year) is expected to push overall corporate growth to 8 - 10 percent. Based on price forecasts of WTI US $95.00/Bbl, $2.50/GJ AECO, and an exchange rate of $0.97 US per dollar Canadian, Guide expects funds flow from operations of between $120 million and $130 million in 2012 ($1.15 to $1.25 per basic share).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.