UTS Energy Corp. is an attractive takeover candidate given the fact that it is trading well below its cash and earnings value, but the company would be selling from a position of weakness, according to UBS analyst Andrew Potter.

He expects the company’s total financing requirement for the Fort Hills oil sands project will be more than $4-billion, roughly $2-billion more than previous estimates. The impact of the cost increase and equity dilution (estimated to be $1.7-billion at $2.50 per share) reduces Mr. Potter’s base net asset value estimate by 52% to $3.42 per share. His price target on UTS falls from $9 to $4.

“Our valuation presumes a large dilution which can be reduced by asset sales provided there is still a reasonable market for undeveloped, long-term bitumen assets – a large unknown at this point,” the analyst said in a note. He maintained a “buy” recommendation in light of the 50% decline in UTS shares over the past week.

“Although there is good return potential in UTS relative to current share prices, it is clearly not for the faint of heart – there is little in the way of short-term catalysts other than the potential for a hostile bid.”

Jonathan Ratner