Questerre (Buy, NOK 6)
Two important triggers coming up next weeks

Over the next few weeks, we see two important triggers for Questerre: 1) results from a court ruling on 20 September that may change the fracking ban and 2)
election in Quebec 1 October with the last polls indicating change to a more oil and gas friendly government. We believe both these events represent very important
triggers for the Questerre investment case. If either 1) the court ruling concludes that oil and gas regulation (and the fracking ban) is not in accordance with the law, or
2) a potential new government elected on 1 October is pro oil and gas, Questerre’s, Lowlands assets in Quebec will be significantly derisked. Our NOK 6/share target
price assume a conservative 15% change for development of the Lowlands. However, we stress the fact that a new government not necessarily means new regulations
that immediately opens up for fracking. At the current share price, you get the company’s assets in Montney at a discount the remaining assets (Quebec, oil shale, and
other) for free, which we find attractive. We keep Buy and NOK 6/share target price.
• Trigger 1 – Court ruling: Questerre has filed a legal motion with the Superior Court of Quebec to stay and set aside specific regulations relating to hydraulic fracturing
ban on basis they are beyond the legal power and authority of the government. The ban was introduced earlier in 2018 and represented a material set back for the oil
and gas industry in Quebec. The results from the court ruling is expected around 20 September, according to the company’s CEO. If the ruling concludes that the
fracking ban is not in accordance with the law, we se substantial derisking potential for Questerre’s Quebec assets. In the event regulations remain unchanged and new
government does not comply with their own guidelines, Questerre are likely to evaluate legal claim for expropriation.
• Trigger 2 – Election on 1 October: Election for government in Quebec is scheduled for 1 October. The latest polls are indicating a change to a more oil and gas friendly
government. Our NOK 6/share target price assumes a conservative 15% change for development of the Lowlands. However, we stress the fact that a new government
not necessarily means new regulations that immediately opens up for fracking.
• Recently increased substantial Lowlands acreage: In June 2018 Questerre announced a letter of intent for acquisition of 753,000 net acres in the Lowlands in Quebec.
The seller is “a senior exploration and production company”, which we interpreted as being Repsol (former Talisman). Questerre will gain operatorship of the acreage
in the Lowlands, which until now has been operated by Repsol. As a part of the deal, Questerre and Repsol will release each other from all claims related to an
outstanding litigation. The litigation is related to costs and the potential damages from drilling of the Gentilly and Fortierville wells drilled in 2010. In preparation for
trial, the company recently obtained an independent assessment of its damage that was estimated to range between CAD 50m and CAD 243m. We are not concerned
about Repsol’s exit from Lowlands as Questerre (and in particular CEO Mike Binnion) has been the voice for development of oil and gas in Quebec. Questerre has also
taken the been very clear on its commitments for social license to operate, which we believe has been an important factor for preserving the value of the Lowlands
acreage. Assuming that the resource base for the Lowlands acreage is evenly distributed on the acreage (a simplification), we estimated a deal value that corresponds
to CAD 0.15-0.58/boe.
• Buy and NOK 6/share target price: Despite a lot of uncertainty around the company’s assets in Quebec, we do not believe there is assigned any value to those assets in
the current share price. We have the company’s producing assets in (Montney/Alberta) at NOK 3.6/share, which means that you get Montney at a discount the
remaining assets (Quebec, oil shale, and other) for free. Further, we note that the company through the acquisition of Repsol’s acreage, increased its exposure towards
the enormous upside potential for the Lowlands acreage in the scenario of a commercial development. We keep Buy and NOK 6/share target price.