Since mid-2023, Kiwetinohk has been on our list of short ideas, not because we don’t like the upstream assets, but because their power diversification efforts lacked clarity, and we modeled the “renewable power” economics (including the combined cycle facilities), as widely uncompetitive with growing the E&P business. Actually, we really like the upstream assets, and believe they are in a generally overlooked part of the Kaybob Duvernay. The Delphi and Ovintiv transactions both vended high-quality Duvernay inventory into Kiwetinohk, with a complementing mature Montney asset base to fund growth, with Montney optionality as the oil-window at Placid is better understood. Today, the equity trades markedly below what recent Duvernay transaction comps would imply it should trade at, with further marks coming as Chevron completes their sale. 

Flow results from their new Duvernay wells are extremely promising, with the average well on the 08-23 pad in-line, or better than the 04-34 pad to the NW. The unbounded well on the north of the pad reached peak instantaneous flow rate at ~1,700Bbls/d of free liquid hydrocarbons (field condensate) and 12,000Mcf/d of liquids rich gas. The middle, and southern wells averaged ~750Bbls/d of free liquid hydrocarbons, and ~9,000Mcf/d of liquids rich gas. Both flow tests were concluded with increasing casing pressure, implying slightly better initial liquids rates for the balance of the month, than the flow tests would dictate. Overall, even given the dispersion between results on the same pad (and recall the middle well is ~2,000’ shorter than the bounding wells), we view these results as derisking an incremental 12 locations between their early 2023 Simonette pad (at 14-29) and this Duvernay pad ~3 miles away. 

Continued Montney exploration indicates economic resource, with core samples from Cygnet’s Placid acreage showing >70% oil saturation in zone. Thus far, Kiwetinohk’s step out Montney wells with smaller fracs have performed in-line with Cygnet’s bigger fracks to the NE on an IP₉₀ basis with less than half the proppant intensity. Montney and Duvernay co-development would greatly improve well economics and serve as a tailwind for the company if they can focus on their E&P business, where they have the inventory to accelerate growth. 

In our view – this is the most important factor for Kiwetinohk’s valuation – will power prices squeeze diversification economics such that Pat Carlson is forced to abandon said projects. Pat is extremely smart and though extremely dedicated (though possibly entrenched) – and ARC Financial (the original private equity backer) owns majority of the outstanding equity, making what any institutional (or retail for that matter) shareholder thinks about the business’s direction completely moot. But there is some hope. Both the Federal, and Provincial governments have enacted new regulations on both fossil fuels used to generate electricity (nationwide), and renewable power projects (provincewide) greatly complicating Kiwetinohk’s power development ability. If the economics are such that power infrastructure is not competitive, we would hope (though not expect) that the board suspend further development activity. For now, Kiwetinohk has removed all but one power project target FID date from their corporate deck, and has softened their stance on the business unit in various filings. We view this as extremely positive. 

On our 2026 estimates, we see Kiwetinohk easily eclipsing 35,000BOE/d, trading at 75% of YE 2026e PDP NPV_10% (using a forward strip price deck). These valuation metrics are in-line with COVID low deal metrics between Crescent Point and Shell, implying a material discount due to Kiwetinohk’s share register and/or power unit (we would strongly assume both). The most relevant transaction would be Cygnet’s purchase of Placid Montney and Simonette Duvernay from the Athabasca/Murphy JV back in 2023. Using a valuation implied by that deal, Kiwetinohk should trade in the $1.7Bn EV band using a blended NAV and cashflow method on our 2025 estimates, today their EV sits barely above $700MM. 

We expect the Chevron/KUFPEC Duvernay package to sell for ~$2.5Bn, on those metrics, we would see an appropriate EV for a 2025e Kiwetinohk at ~$1.1Bn. Notably, Kiwetinohk owns and operates 100% of their processing infrastructure (~180MMcf/d), a valuable attribute in the play. Kiwetinohk also has ~30,000BOE/d of firm service on Alliance through late-2025, shielding them from summer 2024 in-basin gas volatility. 

We view Kiwetinohk’s standalone upstream business very favorably given the valuation, though the continued opaqueness on their reinvestment plans with their upstream free cashflow continues to spook us, and the market. There is clearly extreme value to be realized, though the catalyst must be corporate focus, which is not something we are sure buyers will be able to fully underwrite at this point (though incrementally more than one year ago). What’s the path to value crystallization at Kiwetinohk – we think it’s a different team, though don’t believe that the current management would be amenable to an arrangement that would dramatically benefit shareholders (note, current G&A per BOE is ~$2.70, almost 90% higher than peer averages). ARC Financial backs both Cygnet, and Kiwetinohk, and we believe that Cygnet’s management is better suited to run Kiwetinohk and crystalize value. Given it’s early in the ARC fund’s tenure, we don’t see that happening in the short-term. ARC has only smashed together PortCos once, and it wasn’t popular. A combined Cygnet and Kiwetinohk, we would see breaching 50,000BOE/d by late 2025e, and trading in the $2.4-2.8Bn EV band (with attributable Kiwetinohk equity worth ~$1.6Bn) – though we view that as highly unlikely. 

Kiwetinohk's Duvernay drilling inventory depth, relative to peers of their production size is slightly better, though their Montney inventory, especially on a stay flat basis (recall maintenance drilling is effectively nil) provides a meaningful growth toggle. If Kiwetinohk is ever ready to pivot back to upstream development – there are huge optimizations to D&C costs, and even corporate staffing expenses, that would provide a runway of margin improvement levers, complemented by understood, high-impact inventory. Whether it’s regulations, low power prices (recall that AESO forwards are trading at $60/MWh for 2025, compared to spot at >$150/MWh in 2022), or lack of capital – we would see anything that catalyzes a reorientation of focus back to the upstream business as hugely positive, and makes Kiwetinohk's equity incrementally, much more ownable. 

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