Company Profile

Storm Resources Ltd is a Canada-based oil and gas exploration and development company. The company incorporated in the province of Alberta, Canada on June 8, 2010, and is listed on the TSX under the symbol "SRX". The company is engaged in exploration, acquisition, and production of oil, natural gas, and natural gas liquids reserves in the province of British Columbia.

Investment Rationale

• Balance Sheet Strength: At the end of Q1FY20, the company’s Long-term Debt to Total Capital Ratio stood at 17.3%, which is quite manageable and significantly below the industry average LT debt to Equity ratio of 36.4%. Net Debt/ EBITDA ratio of the SRX stood at 7.47x better than the industry average of 9.13x. Further, the interest coverage ratio of the company stood at 3.87x, reflects the financial strength of the company.

• Better natural gas prices partially offsetting the effect of lower oil prices: The group is likely to benefit from the higher natural gas prices which have improved significantly over the past two months in anticipation of declining associated gas production from US oil producers and form liquid-rich natural gas producers in Canada. Together with the increase in the natural gas prices, the company's hedge position has expanded and at present protects pricing for the rest of 2020 on approximately 42% of annual forecast production.

• Volume Spurt: In the last five trading sessions, SRX recorded positive price return 0.75% and relatively outperformed the sector by 1.36%; further, the last 5-day average traded volume was approximately 243.77% higher against the 30-day average traded volume, implies that the buying interest is increasing in the SRX counter.

• Trading at discounted valuation in terms of Price to Book Value per share multiple: Shares of SRX are available at a discounted valuation from the Price-to-Book Value per share standpoint. At present, SRX shares are trading at a Price-to-Book Value multiple of 0.38x, whereas the peer average Price-to-Book value per share multiple stood at 0.49x, which implies a discounted valuation of 22% against the peers average.

• Risk Associated to Investment: The company's financial performance is significantly exposed to the volatility in crude and natural gas prices. However, these commodities prices are subject to fluctuations in supply and demand dynamics, market uncertainty and other factors. Further, volatility in the forex market as commodity prices are generally placed against the US Dollar can have a positive and negative impact on the company's financial performance. Also, the next wave of COVID-19 outbreak and its potential impact on the oil and gas demand could further weigh on the company's performance.

Q1FY20 Financial and Operational Highlights

During the quarter, the company's revenue slumped by 25% to CAD 41.9 million against CAD 55.8 million reported in a year over period, mainly on account of 38% plunge in the average realized prices. This was partially offset by a 21% increase in the production volume. However, on a sequential-quarter basis, the company's revenue slipped by 14%, due to a 19% reduction in the average realized prices and partially offset by a 7% increase in the production volumes.

Source: Company filings

Revenue from the Natural gas segment declined by 31% to CAD 26.85 million against CAD 39.01 million reported in the same quarter of the previous financial year. The segment accounted for 64% of the company's total revenue, down 700bps on a YoY basis and 300bps on a sequential-quarter basis. Condensate and NGL revenue during the quarter plummeted to CAD 15.07 million, 10% lower against the CAD 16.8 million reported in the corresponding quarter of the FY19. The combined contribution of Condensate and NGL in the company's total revenue stood at 36%, 600bps higher on a YoY basis and 300bps higher on a quarter on quarter basis.

Net Income during the quarter under review stood at CAD 10.5 million against CAD 0.6 million reported in the same quarter of the previous financial year. The growth was primarily driven by a non cash hedging gain of CAD 10.5 million on the mark-to-market value of future hedging contracts which was partially offset by the deferred income tax expense of CAD 3.9 million.

Average Selling Price

Source: Company filing.

SRX’s average realized price (per-Boe basis) for the quarter under review slumped by 38% against the same quarter of the previous financial year. The decrease was primarily on account of the lower natural gas and NGL pricing. The decrease in realized natural gas pricing is primarily due to a reduction in benchmark prices at Chicago and Sumas partially offset by higher Station 2 and AECO monthly index pricing.

Benchmark Prices

Source: Company filings

Source: Company filing.

Revenue net of transportation for the Q1FY20 stood at CAD 14.27 per Boe, a decline of CAD 11.27 per Boe, or 44% on a YoY basis, driven by a lower NGL and natural gas prices. The NGL price plunged by 90% because of lower propane prices and from larger pricing deductions during the current marketing year ending March 2020. The natural gas price declined 43% because of lower pricing in the Chicago and Sumas markets, which contributed 60% to the total sales.

Production, general and administrative, and interest and finance costs were CAD 6.77/Boe, reflects a YoY reduction of CAD 1.53/Boe. Production cost decreased CAD 0.92/Boe with the start-up of the Nig Gas Plant and the previous year was higher due to an unplanned outage at the McMahon Gas Plant.

During the Q1FY20, hedging handed a realized gain of CAD 2.7 million vs a realized loss of CAD 9.6 million in the corresponding previous financial period. The gain was from contracts for Chicago natural gas and WTI oil.

Funds flow was CAD 16.9 million, which was largely unchanged from last year with higher production and lower costs offset lower commodity prices. Capital investment during the quarter stood at CAD 26.5 million and included CAD 11 million for the Nig Gas Plant project and CAD 9 million to complete and tie in a three-well pad at Umbach.

Guidance

The company estimated that the production in the second quarter of FY20 is expected to be in between 23,000-25,000 Boe/day. The capital investment is likely to be CAD 3 million or low. In April 2020, production was approximately 24,500 Boe/day based on field estimates. The company is reducing it further in May and June as liquids production is being reduced as much as possible to avoid sales at very low prices after deducting transportation costs and price differentials.

Stock Performance

Shares of SRX were trading approximately 2.96% down at CAD 1.31 on 24 June 2020. In a year over period, SRX's shares have tested a 52W high of CAD 1.95 as on 26-June-2019 and a 52W Low of CAD 0.85 as on March 2020. At the last traded price of CAD 1.31, its shares traded approximately 33% below its 52W high price level and approximately 54% above its 52W Low price level. This reflects that at the present trading level, the stock is more tilted towards its 52W peak level, which is a favourable trend given the challenging marketing conditions.

Further, SRX's shares are featuring a positive price return in the last 3-Months and past 5-day trading sessions and up by 48.5% and 0.75% at the same time. However, posing a negative return on a YoY basis (-20%) and YTD basis (-17.6%).

SRX's shares are carrying a five-year Beta of 1.57, which implies that the volatility in the stock is approximately 157% higher with regards to the benchmark index.

One year daily price chart, Source: Refinitiv, Thomson Reuters

Top 10-Share Holders

The top 10 shareholders have been highlighted in the table, which together forms around 66.83% of the total shareholding. Libra Advisors, LLC and Canoe Financial LP hold the maximum interests in the company at 14.21% and 12.75%, respectively. The institutional ownership in the SRX stood at 64.33%, and ownership of the strategic entities stood at 12.37%. 

Source: Refinitiv (Thomson Reuters)

Valuation Methodology

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation

The company has a strong balance sheet with a Debt/Equity ratio of 0.29; this implies a majority of assets in the company’s assets are funded by the equity capital. Further, the interest coverage ratio of 3.87x reflects the financial strength of the company. The company mentioned that it has adequate liquidity to manage its financial obligation. The company expects the fund flow to be higher than the capital expenditure for the remaining part of 2020. Further, a demand recovery in oil and gas market, which has also recouped WTI prices after a steep plunge through the March and April 2020, is expected to strengthen oil prices in the next few months. A volume spurt in the stock over the past five trading sessions together with rising SRX’s share prices implies that the buying interest is rising. However, volatility in the commodity prices, CAD/USD exchange risks, and general economic condition are key risks to the company.

Therefore, after considering the risk and return trade-off and valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the current price of CAD 1.31 (as on June 24 June 2020), based on the NTM EV/EBITDA multiple of 4.85x, on the FY20E EBITDA. We have considered Kelt Exploration Ltd (TSX: KEL), Surge Energy Inc (TSX: SGY) and Nuvista Energy Ltd (TSX: NVA) etc., as a peer group for the comparison purpose.

Disclaimer

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