Journey Energy Inc (TSX: JOY) is a Canadian exploration and production company focused on conventional, oil-weighted operations in Alberta province. The company's principal revenue source is from petroleum and natural gas sales which include the sale of crude oil, natural gas and natural gas liquids, of which it derives key revenue from the sale of crude oil. JOY strategy is to grow the production base by drilling on its existing core lands, implementing waterflood projects, executing on accretive acquisitions.  The company seeks to optimize its legacy oil pools on existing lands through the application of best practices in horizontal drilling and, where feasible, with water floods.

Investment Rationale

• Higher Oil and Natural Gas Prices Driving Growth: While oil prices have improved from the first quarter of 2020, the ongoing COVID-19 pandemic is continuing to create uncertainty about when the global economy can return to a normal state. Journey's realized crude oil prices during the first quarter of 2021 averaged CAD 57.37 /bbl, which was 43% higher than CAD 40.03 /bbl realized in the first quarter of 2020. Natural gas prices showed solid improvement as well, and Journey realized CAD 3.00 /mcf compared to CAD 1.23 /mcf in the first quarter of 2020. Overall, Journey's average realized commodity prices were 60% higher during the first quarter of 2021 at CAD 34.57/boe as compared to CAD 21.61 /boe in the same quarter of 2020.

• Strong Q1FY21 Performance: During the quarter under consideration, the company's top line surged by 29%, led by a solid improvement in oil and natural gas prices. The group reported a net profit of CAD 1.699 million against a net loss of CAD 65.4 million reported in the corresponding quarter of the previous financial year.

• Significant Improvement in Gross Margin and EBITDA Margin on QoQ basis: On a sequential-quarter basis, JOY reported a significant jump in margin profile led by solid top-line performance in the wake of higher crude oil prices. Gross Margin improved from 46.4% to 53%, EBITDA improved to 34.9% in Q1FY21 from 31.9% in Q4FY20.

• Three Sequential Quarters of Liquidity Improvement: Over the past three consecutive quarters, the group’s liquidity has improved substantially with the current ratio of 0.55x at the end of the Q1FY21 from 0.09x reported at the quarter ended September 2020.

• Deleveraging Balance Sheet: During the first quarter of 2021, the company’s reduced net debt by 35% to CAD 83.7 million from CAD 128.4 million at the end of the first quarter of 2020. This reflects that the company’s balance sheet risk is reducing.

• Technical Strength: From the technical standpoint, JOY shares are hovering in a steep bullish zone, as at the last closing price, its shares were traded well above the crucial long-term as well as short-term support levels of 200-day and 50-day SMAs, which is a bullish indicator. Moreover, the leading momentum indicator, the Moving Average Convergence Divergence (MACD), is rising, with the spread between 12-day and 26-day EMA is positive. This is a bullish indicator. Further, the MACD oscillator is hovering above the 9-day SMA signal line. Also, the 14-day RSI is hovering in a neutral zone with a bullish bias at 63.5.

Technical Price Chart, Analysis by Kalkine Group

• Risk Associated to Investment: The company’s financial performance is largely linked to the volatility in crude oil and natural gas prices. Further, given the higher debt contribution in the group’s capital structure, the company is also exposed to balance sheet risk.
  

Financial Highlights: Q1FY21

• During the quarter under consideration, the company Produced 7,577 boe/d with 54% coming from natural gas production, 38% from crude oil and 8% from NGL's. 100% of Journey's production is currently unhedged.
• However, Aggregate sales volumes for Journey's commodities declined by 19% from 9,325 boe/d in the first quarter of 2020 to 7,577 in the first quarter of 2021. Journey's sales volume mix shifted slightly more towards natural gas as the wells drilled in 2019 had a higher oil weighting.
• The decrease in production was due to natural declines and a lack of capital for both drilling and optimization projects. The declines were reflective of the higher initial decline rates from wells drilled in 2019 and are not reflective of Journey's current base decline rate. Journey's current annual decline rate is estimated to be 14% and is expected to be moderated by optimization projects returning shut-in wells to production.
• The company produced 5,854 megawatts of electricity at its new electricity generation facility in Countess, Alberta, at an average price of CAD 130 /MW.
• In mid-March of 2020, the COVID-19 pandemic was causing systematic shutdowns of global economies, and world oil prices experienced a severe decline. WTI oil prices declined below USD 20 /bbl, making several of Journey's oil properties uneconomic to operate. Consequently, Journey took prudent and immediate action to shut in approximately 1,500 boe/d (73% crude oil and NGL's) of its production effective the first week of April. Journey restarted the majority of shut-in production early in the third quarter of 2020.
• Finance expenses related to borrowings decreased by 4% to CAD 2.0 million in the first quarter of 2021 from CAD 2.5 million in the same quarter of 2020. Average, interest-bearing debt decreased by 28% in the first quarter of 2021 compared to FY20 as a result of the settlement of Journey's bank debt for less than its face value on October 30, 2020.
• Journey generated a net income of CAD 1.7 million in the first quarter of 2021, which was largely attributable to higher commodity prices but also because of lower depletion charges during the quarter.
• Adjusted Funds Flow reversed course from a negative CAD 0.2 million in the first quarter of 2020 to a positive CAD 8.7 million in the first quarter of 2021.
• Cash flow from operations was CAD 3.4 million in the first quarter of 2021, or CAD 0.08 per basic shares and CAD 0.07 per diluted share.
• Journey has been able to take advantage of the previously announced Site Rehabilitation Program, whereby funds are provided to the industry to complete abandonment work. Journey has been allocated approximately CAD 3.37 million in programs 1-5.
• These funds would be utilized to abandon wells, facilities and also to conduct Phase 1 and Phase 2 environmental assessments. Approximately CAD, 1.1 million of these funds, have been expended to date. 

Top-10 Shareholders

Top-10 shareholders together holds 44.34% stake in the company. Alberta Investment Management Corporation and Infra-PSP Partners, Inc. are the biggest shareholders, with an outstanding position of 17.6% and 12.4% respectively. The institutional ownership in the company stood at ~19%.

Valuation Methodology (Illustrative): Price to Cash Flow Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

Higher crude and natural gas realization prices positively impacted the company’s financial performance. With a solid rally in the crude oil prices in the second quarter of fiscal 2021, we believe JOY to report solid performance in the second quarter of FY21 as well. Moreover, the mid-term outlook for oil is quite promising given the solid recovery in the economic activities post approximately 1-year of challenges. Also, gradual recovery in the tour and transportation industry would also extend support to oil prices.

The company was deleveraging its balance sheet and exited the first quarter of 2021 with net debt of CAD 83.7 million, which was 35% lower than CAD 128.4 million at the end of the first quarter of 2020. Journey is concentrating its efforts on paying down the term debt owing to AIMCo and, to this end, has already made payments of CAD 3.75 million in March and CAD 2.0 million in April of 2021.

From the technical standpoint, its shares are hovering in a steep bullish territory, with MACD is rising and hovering above the 9-day SMA line, reflects a bullish momentum. Based on technical analysis, the stock has support at CAD 0.95 level.

However, the company’s business can be substantially impacted by any adverse move in the oil and natural gas prices.

Therefore, based on the above rationale and valuation, we suggest a “Speculative Buy” recommendation on the stock at the closing price of CAD 1.16 on June 22, 2021.          

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

 1-Year Price Chart (as on June 22, 2021). Analysis by Kalkine Group

*Recommendation is valid at June 23, 2021 price as well.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.