* Editor's Note:* Starting on July 1, idea write-ups such as the one published today on Inplay Oil will only be made available to subscribers on "Ideas from HFI Research."

There’s a lot to like in InPlay Oil (IPO:CA). Among the company’s most attractive features is its cash flow torque to higher commodity prices, with even slightly higher prices generating considerable growth in value per share.

If we estimate InPlay’s annual free cash flow based on its first-quarter production mix of 57.4%/47.6% liquids/natural gas, the shares are slightly overvalued. At 9,250 boe/d, $80.00 per barrel WTI, and $2.25 per barrel natural gas, we estimate InPlay would generate C$87.7 million of funds from operations and C$22.2 million of free cash flow. At the stock’s current price of C$2.20, it would generate C$0.24 per share of free cash flow for a 10.8% cash flow yield. We consider a 12% yield appropriate for a smaller E&P, so the shares would be slightly overvalued, with implied downside of 10.3%.

However, if we incorporate management’s full-year 2024 production mix guidance of 60%/40% liquids/gas, free cash flow prospects improve considerably. Assuming the same commodity prices, InPlay would generate C$91.7 million of funds from operations and C$26.2 million of free cash flow, equivalent to C$0.28 per share for a 12.7% free cash flow yield. The shares are now undervalued and imply 6.0% upside.

An more liquids-focused production mix is one of several levers available to InPlay’s management for materially boosting free cash flow per share.

We expect the company to achieve its full-year guidance, and we believe $80 per barrel WTI and $2.25 per mcf natural gas are conservative assumptions for the coming years. We therefore consider InPlay shares to be attractively priced.

**Massive Cash Flow Torque with Limited Downside**

If we use our 2024 price assumptions of $87.50 per barrel WTI and $2.25 per mcf natural gas and the 60%/40% production mix, we estimate InPlay would generate C$40.2 million of free cash flow, equivalent to a 19.5% free cash flow yield on the current share price. At a 12% free cash flow yield, the shares would trade at C$3.58, implying 62.6% upside from their current price.

Our discounted cash flow valuation at these commodity prices, in which we use a 12% discount rate and cut the terminal value in half, implies the shares are worth C$3.00, representing 36% upside from their current price.