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

• Insiders Buying: Gurdeep Singh Gill – Vice President, Business Development at Yangarra Resources has bought approximately 35,000 shares of YGR at an average price of ~ CAD 0.62 on January 22, 2021. Including the recent transaction, the net buying by Gurdeep Singh Gill stood at 275,000 shares over the past one month. Moreover, the insiders stood net buyer throughout the 2020 despite a free fall in the stock price. The recent insiders buying, and net buyer stance of insiders shows that the management is quite optimistic on the future performance of the company led by a stable crude oil and natural gas prices. Also, insiders buying extend a lot of confidence to retail shareholders as well.  

Source: Refinitiv (Thomson Reuters)

• Solid Balance Sheet: At the end of the September quarter, the company’s Debt/Equity ratio stood at 0.68x, lower than the industry medina of 0.96x. Moreover, the company’s debt outstanding is manageable, given the interest coverage ratio of 1.57x at the end of the September quarter.

• Positive Spread Between ROCE and Weighted Average Cost of Debt: The company’s reported Return on Capital Employed stood at 8.5%, and Weighted Average Cost of Debt (Kd) stood at 3.2%, implies a spread of 5.2%, which reflect the operational excellence of the management and deploying funds where returns are higher than the cost of capital. A higher spread between ROCE and Kd provide a margin of safety for the investors and also bolster free cash flow of the company to fund its future capex and revenue expenditures as well.

• Reported Solid EBITDA Margin Improvement in Q3FY20: After a steep EBITDA margin fall reported by the company is the second quarter of FY20 led by large swings in the crude oil prices, the company recorded significant expansion in EBITDA margin in the Q2FY20. Q3FY20 EBIDTA margin of the company stood at 71.5%, approximately 2070bps higher on a sequential-quarter basis and 3770bps higher against the industry median. This shows greater efficiency of the management and business model.

• Maintained a Solid Margin Profile: 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.

Source: Refinitiv, Thomson Reuters

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

Technical Price Chart (as on February 02, 2021). Source: Refinitiv (Thomson Reuters)

• Risk Associated to Investment: The company’s busines is closely synched to the commodity price cycles. A decline in the 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 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 “CAD”)

Source: Company Filing

• Oil and gas sales were CAD 18.9 million, a decrease of 40% from the same period in 2019, driven by lower comparable period oil prices, led by lower demand for oil in the wake of covid-19 led distortions.
• Royalties were 5% of oil and gas revenue as compared 7% as a percentage of sales in the previous corresponding quarter.
• 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.

Source: Company Filing.

• All in cash costs were $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

• 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 generate 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 16.11% 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 4.23%, and strategic ownership stood at 14.23%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

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

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation:  With capital efficiencies improving materially, and the strengthening of natural gas prices and more stability in oil prices, the company is well positioned to capitalize on it.

Despite a lower performance on a YoY basis, the company has recorded solid recovery in margin profile on a sequential-quarter basis. The company’s gross margin during the third quarter of FY20 stood at 79.2%, improved by 940bps against the sequential quarter. EBITDA surged to 71.7% in the same quarter from 51% reported in the previous quarter, implies a jump of 20.7 percentage points. Operating margin surged to 34.6% from 3.4% in the second quarter of 2020, leapt up 31.2 percentage point. Net margin returned to positive 3% against negative 17.5% reported in the previous quarter. The improvement in the company’s margin profile was primarily driven by a solid recovery in the oil prices in the third quarter of 2020.

Going forward, we expect a gradual recovery in oil demand as a number of vaccines got approval from various regulatory bodies and economic activities are coming back on track. Improved oil prices on the back of demand recovery would result in better financial performance for the group.

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

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 0.86 on February 02, 2021.

Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at February 3, 2021 price as well.

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