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Is There Light at the End of the Tunnel for Lightstream?

Troubled intermediate Canadian intermediate oil explorer and producer Lightstream Resources (TSX: LTS) continues to pump out good news regarding the progress of its much vaunted turnaround strategy. The key elements of this turnaround strategy are focused on the disposition of non-core assets as well as paying down debt coupled with a more focused allocation of exploration and development capital.

Turnaround strategy continues to gain traction
As part of the turnaround program, in November 2013 Lightstream committed to divesting itself of $600 million in assets over the next two years. To date, Lightstream has achieved well over a third of that target, with a recent announcement confirming the sale of its royalty interest assets in southeast Saskatchewan for $141 million.

This is a particularly promising outcome when one considers that the market is awash with Canadian oil assets with a number of Canadian oil companies putting non-core assets up for sale as part of their own turnaround strategies. Lightstream’s goal is to reduce debt to a sustainable 2.5 times operating cash flow, from a very unsustainable 4 times operating cash flow. The proceeds from asset sales to date have been directed to paying down the company’s debt, which has already created approximately $9 million in annualized interest savings.

More promising is the company has secured a one-year extension on its covenant-based lending facility to June 2017, giving it further breathing space to complete the required asset sales and pay down debt. With Lightstream’s share price tumbling 21% over the last year it now appears attractively priced with an enterprise-value of 7 times EBITDA and 19 times its oil reserves.

This is lower than Penn West Petroleum’s (TSX: PWT)(NYSE: PWE) enterprise value of 12 times EBITDA and Whitecap Resources’ (TSX: WCP) enterprise value of 17 times EBITDA and 21 times reserves. Penn West itself is in the midst of implementing a similar turnaround strategy to Lightstream’s, while Whitecap continues to go from strength to strength with recent acquisitions boosting its value and profitability.

Furthermore, despite slashing its dividend by 50% in November 2013 as part of a plan to retain capital and restore its balance sheet, Lightstream still pays a dividend with a yield of over 7%. There are still some concerns over the sustainability of this dividend, but with Lightstream’s turnaround program continuing to gain traction, its sustainability continues to grow.

Foolish bottom line
Finally there may be some light at the end of the tunnel for Lightstream investors. After over-promising and under-delivering for some time it appears the company is working hard to turnaround its operations and unlock value. It may be some time before it is out of the woods, but with the turnaround program gaining traction in a difficult operating environment there is hope for shareholders yet.

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Fool contributor Matt Smith does not own shares of any companies mentioned.

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