Bonterra Energy Corp (TSX: BNE) is an oil and gas exploration company operating in the Western Canadian Sedimentary Basin. The company develops and produces crude oil, natural gas, and natural gas liquids. Bonterra operates in one industry and has only one reportable segment. Its assets consist of crude oil and natural gas assets.

Key Highlights

• Clocking higher production and higher average realization: Despite periodic shut-ins owing to gas processing capacity limits, the company's average production of 13,287 BOE per day in Q1 2022 grew by 12% over Q1 2021. When compared to Q1 2021, the rise in production was attributed to an aggressive drilling program that brought new volumes into a strong commodity pricing environment, as well as the reactivation of previously shut-in wells owing to low commodity prices.

• Consistently upscaling revenues: Despite the challenging environment, the Company maintained its pace and delivered good sequential consolidated revenue, which is a significant plus. Revenue from realized oil and gas sales reached CAD 91.5 million in Q1 2022, an 88% increase over Q1 2021 and a 16 percent increase over Q4 2021, principally due to increased commodity prices, which produced solid netbacks and a robust production profile.

• Robust cash flows: Cash flow from operations grew by CAD 26.2 million in Q1 2022 compared to the same period in 2021. This was largely due to increased commodity prices and production volumes, as well as a drop in interest expense, which was offset in part by higher royalties, production costs, and realized risk management contract losses. On sequential basis, cash flow from operations are also witnessing an uptrend on the back of higher realized crude oil and NGL prices, is also a key positive.

• Curtailing debts: The company continues to prioritize debt reduction while managing cash flow and capital expenditures. As of March 31, 2022, its net debt was CAD 260.6 million, down from CAD 328.5 million in pcp, owing mostly to increasing cash flow from rising commodity prices and higher production volumes. Furthermore, the company's debt to equity ratio in Q1 2022 was 0.58x, the lowest in the previous five quarters. With commodities prices still robust in 2022, the company aims to maintain its emphasis on lowering net debt, which is a favorable statement from management.

• Industry beating margins: The resilient business, management’s solid determination along prudent steps coupled with elevated volume and higher realization prices, helped the company in leaping an industry median margin on many fronts in Q1 2022, which is a key positive. The chart below gives a glimpse of this.

• Strong Guidance for FY 2022: The company is gladly maintaining its previously stated 2022 production projection of 13,300 to 13,700 BOE per day based on a capital expenditure budget range of CAD 55 million to CAD 65 million, depending on a successful first quarter of 2022. With a solid first quarter and the remainder of the 2022 capital program, the Company expects CAD 100 million in free funds flow for fiscal 2022, which will support ongoing improvement in leverage measures.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 2.1x compared to the industry (Energy) median of 4.9x. while on NTM Price/Cash Flow multiple the stock is trading at 1.9x compared to 4.2x. This implies that the shares are trading at deep discount against the industry. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.

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 prices. The company also enters physical and financial derivative contracts to manage exposure to fluctuations in commodity prices.

Financial overview of Q1 2022

Source: Company Filing

• Strong sales: The company’s net sales reached CAD 66.3 million in Q1 2022, an increase of CAD 25.7 million or 63.3% over CAD 40.6 million in pcp. This robust increase was primarily due to higher volume and higher average realization prices.

• Higher operating expenses: In the reported period of Q1 2022, an operating expense increased to CAD 51.5 million against CAD 42.8 million in pcp. However, the operating expenses as a % to sales (net of royalties) in the same period decreased to 63.7% against 95% in pcp.

• Earnings before income taxes in the reported period was at CAD 14.8 million compared to negative earnings of CAD 2.2 million in pcp.

• Robust net earnings: On the back of above stated rationales, in Q1 2022, the company posted elevated net earnings of CAD 10.5 million against a loss of CAD 1.6 million, partially offset by higher income tax.

Top-5 Shareholders 

The top 5 shareholders are illustrated in the pie chart below, which forms around 28.82% of the total shareholding. Fink (George F) and Oberndorf, William holds the company's maximum interests at 13.01% and 11.19%, respectively. The company's strategic entities ownership stood at 25.90%.

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group 

Stock Recommendation 

In the first quarter of 2022, the business benefited from considerably higher commodity prices as global supply and demand dynamics produced a good tailwind for pricing. Higher netbacks, along with a successful drilling and completions program, resulted in better quarterly sales revenue, funds flow, and free funds flow, all of which were dedicated toward further improving the company's debt profile. These achievements have strategically positioned the Company to pursue the continuous profitable development of its high-quality, low-oil-weighted asset base.

In addition, the company has reiterated its previously announced 2022 production projection of 13,300 to 13,700 BOE per day, based on capital expenditures ranging from CAD 55 million to CAD 65 million. Furthermore, it anticipates CAD 100 million in free cash flows in FY 2022, a considerable increase. 

Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the last closing price of CAD 11.80 as on May 25, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 25, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on May 26, 2022, price as well.

 Technical Analysis Summary

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Disclaimer

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