Advantage Energy Ltd (TSX: AAV) is a Canadian energy company that provides clean, affordable, reliable, and sustainable energy to meet the demands of Canada and the world. Its Montney natural gas and liquids resource is being developed and delineated at Glacier, Wembley/Pipestone, Valhalla, and Progress, Alberta.

Key Highlights

• Up trending revenues: A favorable characteristic of the Company's sales success is that it is consistently lively. The company's natural gas sales, excluding derivatives, were CAD 106.2 million in Q3 2021, up 136% from CAD 45.0 million in the previous corresponding period. The increase in sales is mostly attributable to rising natural gas prices in all of the major natural gas hubs. In Q3 2021, total sales including realized derivatives totaled CAD 110.3 million, with natural gas accounting for 79% and liquid sales accounting for 21%.

Source: Company Filing 

• Robust average daily production: In Q3 2021, the company's total production output averaged 50,025 boe/d, up 13% over the previous similar period's average of 44,448 boe/d. Total average production output has grown as a result of the addition of five wells at Glacier and two wells at Valhalla in the third quarter of 2021, resulting in enhanced natural gas production.

Source: Company Filing 

• Enhancing efficiency and performance: The company stated a lowering operational cost over the years, driven by an upturn in drilling performance and constant focus on placing proppant more efficiently while improving completions intensity. This reduction in operating cost will augur margins improvement.

Source: Company Presentation 

• Sequentially growing operating matrix: Given the strength of a business over the past number of quarters, the Company maintained its pace and witnessed the spirited performance across its gross margin, EBITDA margin, operating margin and net margin. The Company is continuously working to grow its profile and higher average realization cost of the commodities has also supported, which is appreciable. 

Source: REFINITIV, Analysis by Kalkine Group 

• Elevated adjusted funds flow: The company generated adjusted funds flow of CAD 63.4 million and CAD 163.6 million for the three and nine months ended September 30, 2021, respectively. The rise in adjusted funds flow was principally attributable to higher petroleum and natural gas sales as a result of significantly higher natural gas and crude oil benchmark prices, offset in part by higher realized derivative losses. Furthermore, the company generated record free cash flows of CAD 32.0 million during the year under review, which is a significant plus.

Source: Company Filing, Analysis by Kalkine Group

• Minimizing net debt: On the back of elevated cash from operation mainly due to increase in petroleum and natural gas sales, the company accelerated its debt reduction. In Q3 2021, the company minimized its net debt to CAD 167.9 million compared to CAD 251.3 million on December 31, 2020.

Source: Company Filing 

• Healthy Guidance for FY2021 and FY2022: The Company's capital projection for 2021 remains unchanged at CAD 140 to CAD 150 million, with 49,500 boe/d as the midpoint of production guidance. Annual production per share growth is now expected to be over 10%, as drilling results continue to exceed forecasts. However, for FY2022, the company plans to increase adjusted funds flow by drilling high-rate-of-return targets in locations with existing infrastructure. Average Production (boe/day) is expected to be in the range of 52,000 to 55,000, while Liquids Production (bbls/d) is expected to be in the range of 5,400 to 5,800.

• Industry beating margins: Despite the instability due to Covid-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q3 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 

Source: REFINITIV, Analysis by Kalkine Group

Risks associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors are like lower demand, lower production, volatility in crude and natural gas prices. The company also enters physical and financial derivative contracts to manage exposure to fluctuations in commodity prices and foreign exchange rates.

Financial Overview of Q3 2021 (expressed in thousands of CAD)

Source: Company Filing

• Clocked higher revenues: In Q3 2021, the company’s revenue increased phenomenally to CAD 119.9 million compared to CAD 30.3 million in the previous corresponding period. The rise was mainly due to increase in natural gas prices in all major natural gas hubs and higher production.
• Cost efficiency: The company’s total expenses as a percentage to revenue fell at 56% to CAD 67.3 million in Q3 2021, compared to 194% at 59.0 million in pcp. Although its transportation expense increased mainly due to higher production.
• Higher income before tax: On the back of robust revenues and controlled expenses the company clocked income before tax and non-controlling interest of CAD 52.5 million against a loss of CAD 28.6 million in pcp.

• Turnaround from loss to profit: The Company posted a net profit of CAD 43.1 million, compared to a loss of CAD 21.6 million. The transformation was primarily due to higher revenue, coupled with net income before tax, partially offset by income tax in the reported quarter.

Top-10 Shareholders 

The top 10 shareholders have been highlighted in the table, which forms around 41.01% of the total shareholding. Mackenzie Financial Corporation. and EdgePoint Investment Group Inc. hold the company's maximum interests at 9.36% and 8.99%, respectively. The company's institutional ownership stood at 46.30%.

Valuation Methodology (Illustrative): Price to Cash flow-based Valuation Metrics 

Stock recommendation 

On the strength of restricted supply and expectations of robust demand, global crude oil and natural gas prices have recently seen a healthy rally in respected prices. Even global anxieties over the Ukraine-Russia conflict caused a rise in the commodities prices. Furthermore, natural gas prices are rising in response to projections of colder weather and increased heating demand. Governments also loosened some restrictions, allowing economies to reopen, resulting in a surge in demand. In terms of the company's business, all of these indicators are becoming green.

Operational performance of its summer development program exceeded expectations, with many of the new wells ranking amongst the best producers in its history. Moreover, for FY2022, the company is focused on growing adjusted funds flow by continuing to drill high rate-of-return targets in areas with existing infrastructure capacity and expects higher production. Along this the company is lowering operational cost over the years, driven by an upturn in drilling performance. This reduction in operating cost will augur margins improvement.

We believe the company is fundamentally sound, with a strong balance sheet, persistent debt reduction, a strong liquidity profile, and a profitability profile that is roughly comparable to those of its larger peers. Hence, considering the aforesaid rationales and risks involved, we recommend a “Speculative Buy” rating on the stock at the current market price of CAD 6.19 at 10:04 A.M Toronto time on February 18, 2022.

One-Year Technical Price Chart (as on February 18, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

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