Yangarra Resources Ltd. (TSX: YGR) is a junior oil and gas company engaged in the exploration, development and production of natural gas and oil with operations in Western Canada, with a main focus on the Cardium in Central Alberta, where the company has an extensive infrastructure and landholdings.

Revenue Mix

Business Segment

Investment Rationale

• Strong recovery in crude price fanning YGR stock higher: WTI Crude rallied from ~$34.0/bbl (on October 30, 2020) to~ $50.0/bbl (on January 06, 2021). This implies a return of approximately 51% in the last 67 days, thanks to optimism over the COVID-19 vaccine and the US election results. The possibility of OPEC+ deepening production cuts and China increasing the quota for oil imports for its refineries also helped sentiments. A sharp recovery in oil prices has really helped oil exploration companies across the board, and Yangarra Resources is no exception.

• Insiders used free fall in the stock as an opportunity: Gurdeep Singh Gill – Vice President, Business Development at Yangarra Resources has bought approximately 1,65,000 shares of YGR at an average price of ~ CAD 0.52, and James A. Glessing- CFO at Yangarra has also bought 75,000 shares at an average price of CAD 0.54, as on December 21, 2020. More importantly, there was a lot of insider buying in March 2020, when the stock was melting. As a result, the insiders stood net buyer throughout 2020 despite a free fall in the stock price. Insiders buying shows that the management is quite optimistic about the future performance of the company led by the expectation of stable crude oil and natural gas prices in the coming quarters.

• Bullish technical indicators: Shares of YGR were hovering in a bullish price zone, with stock were traded well-above its 200-day SMA, which act as a crucial long-term support level. Moreover, YGR shares were also traded above its short-length 26-day EMA and long-length 50-day EMA, which is a bullish indicator. Also, the leading momentum indicator, the MACD oscillator hovering above its 9-day SMA signal line, with the difference between 12-day and 26-day EMA is positive that is another bullish indicator.

• Manageable debt: At the end of the September quarter, the company’s Debt/Equity ratio stood at 0.68x, lower than the industry medina of 0.91x. This shows that the company has manageable debt outstanding, given the interest coverage ratio of 1.57x at the end of the September quarter.

• Reported solid EBITDA margin improvement in Q3FY20: After a steep EBITDA margin fall reported by the company in second quarter of FY20 led by large swings in the crude oil prices, the company’s EBITDA margin improved significantly in Q3FY20. During Q3FY20, EBIDTA margin stood at 71.5%, approximately 21 percentage points higher on a sequential quarter basis and 38 percentage points higher against the industry median, which shows greater efficiency of the management and business model.

Source: Refinitiv (Thomson Reuters)

• Q3FY20 result outperformed the industry: The group’s performance was in the third quarter of 2020 was significantly better than the previous quarter; however, deteriorated when compared on a YoY basis, on account of big swings in the oil market. During the quarter, the company has outperformed the industry significantly in terms of margin profile and RoE.

Source: Refinitiv (Thomson Reuters) 

• Risk associated with investment: The company’s business is closely synched to the commodity price cycles. Volatility in crude oil and natural gas prices would have a significant impact on the company’s financial performances. Further, a new wave of coronavirus is posing a short-term risk to the company, as the UK is further undergoing through a nation-wide lockdown and surging new muted strain cases in the United States further posing a demand risk for the oil and its derivatives.

Financial Highlights: Q3FY20 (figures in Canadian Dollar)

Source: Company Filing

• Total sales in Q3 2020 decreased by 42% to CAD 18.9 million from CAD 32.0 million in Q3 2019. The decrease is attributable to:
  • A 9% decrease in average product prices
  • A 34% decrease in production (on a boe basis). Operating netbacks were CAD 16.67 for the three months ended September 30, 2020 and decreased by 34% when compared with same quarter of previous financial year.
• Funds flow from operations stood at CAD 10.0 million, a decrease of 47% from the same period in 2019. Net income came in at CAD 0.5 million, a decrease of 92% from the same period in 2019.
• Field netbacks decreased by 6% for the Q3FY20 on a YoY basis.
• Royalties were 5% of oil and gas revenue as compared 7% as a percentage of sales in the previous corresponding quarter.

Source: Company Filing.

• All in cash costs were CAD 11.06/boe.
• Net Debt at the end of the September quarter stood at CAD 193.9 million, an increase of 4% on a YoY basis.
• Retained earnings at the end of Q3FY20 stood at CAD 104 million.
• As of September 30, 2020 and December 31, 2019, the Company considers its receivables to be aged as follow:

Source: Company Filing

• Further, the Company’s 2020 budget was CAD 105 million however after spending CAD 25 million in the first quarter of 2020 all capital operations had been suspended due to the prevailing economic conditions and guidance has been suspended. In the third quarter, the outlook on commodity prices improved and the Company was able to deliver drilling and completion cost reductions; as a result Yangarra resumed its capital program in August 2020.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 16.95% of the total shareholding. Gordon A Bowerman and James G Evaskevich hold the maximum shares in the company at 4.3% and 3.1%, respectively. Institutional ownership in the company stood at 5.27%, and strategic ownership stood at 14.08%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA

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

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation:  The company has maintained a solid margin profile over several quarters. However, the performance deteriorated in the first half of 2020 as the sector was going through a steep pain owing to COVID-19 pandemic. Oil prices recorded a relief rally in the recent past, and consequently, the group’s performance rebounded. The company has reduced drilling and completion costs by 20-25% as compared to pre-COVID-19 wells because of the addition of a construction division, revised well designs, water handling improvements and a variety of other structural cost-saving initiatives. With capital efficiencies improving materially along with the strengthening of natural gas prices and more stability in oil prices, Yangarra is well-positioned to capitalize it.

Moreover, the recent insiders buying activities shows that they are bullish on the group’s future performance. Further, technical indicators are also moving in favour of the bulls, with stock traded above its crucial short-term as well as long-term support levels.

Going forward, we expect oil demand to improve as the world is hopeful on COVID-19 vaccine, which would support the oil demand and subsequently oil prices. Improved oil prices would result in better financial performance for the group.

Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 0.79 as on January 5, 2021, with lower double-digit upside potential.

YGR daily technical chart. Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 6, 2021 price as well.

Disclaimer

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