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

• Outperformed the Industry on Various Financial Metrics: The group reported a decent quarterly result in Q4FY20 amid a challenging operating environment. Also, the group has outperformed the industry on various financial parameters, which is evident from the below chart.

Source: Refinitiv (Thomson Reuters)

• One of the few Oil Companies Reported Positive Bottom-Line Number in FY20: Not many oil companies can say that they were profitable in the fiscal year 2020. However, Yangara reported a positive bottom line as Lower Impairment Charges had bolstered the profitability. One of the reasons that Yangarra has so far avoided the impairment charge is that the Company is a relatively recent startup story. Therefore, the Company does not have a lot of older wells that had costs associated with costly and antiquated completion techniques. 

• Wells Become More Profitable: Yangarra Resources management had previously announced a solid budget in the face of declining oil prices, which literally went through the floor in the second quarter. The management continued to find ways to decrease costs. As a result, already profitable wells became more profitable. In addition, it is one of the very few companies that did not have to take an impairment charge that reduced income to a loss. Also, the current level of oil prices could further expand its well profitability. 

• Cash Flow can Grow Very Fast: The overall average price earned by the Company was lower in FY20 when compared to the year ended December 31, 2019, as Oil and NGL pricing was lower during the year due to the impact of COVID-19 and the OPEC+ price war. Operating netbacks decreased by 29% for the year ended December 31, 2020, due to the pricing changes. However, on account of improving macro conditions and higher WTI prices (above US$60/bbl), the cash flow could grow very fast in the next few quarters. Also, the Company’s 2020 cost-cutting program has generated significant structural and sustainable per well savings on drilling and completions. Yangarra’ s most recent drilling, and completions costs have averaged CAD 3.25 million per two-mile well, down 24% from an average of CAD 4.25 million over the last two years. As a result, the Company expects to drill and complete 17 wells for 2021. 

• IRR Could Improve at Current Oil Prices: Current oil prices ensure a much greater IRR than in 2020. Another consideration is that these wells provide a satisfactory return even when the price of oil approaches WTI US$40/bbl.

• Bullish Technical Indictors: Shares of YGR hovering in a bullish price zone, with stock traded 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, 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. This is a bullish indicator.

Technical Price Chart (as on April 27, 2021). Source: Refinitiv (Thomson Reuters)

• Risk Associated to Investment: The company’s business is closely synced to the commodity price cycles. A decline in crude oil and natural gas prices may 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 India and few other countries is further undergoing a lockdown and surging new muted strain cases, further posing a demand risk for the oil and its derivatives.

Financial Highlights: FY20

Source: Company Filing

• Total sales decreased by 41% in 2020 to CAD 85.0 million from CAD 145.1 million in 2019. The decrease was attributable to: i) a 25% decrease in average product prices and ii) a 21% decrease in production (on a boe basis).
• The decrease in production was partially due to the 2,500 boe/d (52% liquids) that was shut-in for six weeks during the third quarter due to third-party infrastructure maintenance and partially due to natural declines combined with a reduced drilling program in 2020.
• Operating netbacks decreased by 29% for the year ended December 31, 2020 due to the pricing changes.
• Royalties decreased to CAD 4.2 million for the year ended December 31, 2020 or 5% as a percentage of sales (excluding commodity contact settlements). The decrease was a result of higher gas cost allowance amounts due to the gas infrastructure spending in 2019 and lower royalty rates as a result of reduced commodity prices.
• Production and transportation costs decreased by 8% on a per boe basis when compared to 2019 due to the establishment of a construction division and other structural cost saving measures.
• G&A decreased by 21% on a net basis and decreased by 32% on a gross basis when compared to 2019 due mainly to the suspension of the Company’s bonus program. G&A remained flat on a boe basis due to reduced production in 2020.
• Yangarra did not pay income taxes in 2020 and does not expect to pay income taxes in 2021 as it has sufficient tax pools to cover taxable income. The deferred taxes decreased compared to 2019 due to the changes in corporate tax rates in Alberta and the lower net income for the year ended December 31, 2020.
• Retained Earnings significantly bolstered to CAD 103.85 million as compared to CAD 60.5 million in the previous financial previous.

Top-10 Shareholders

The top-10 shareholder together holds 16.5% stake in the company, with Bowerman (Gordon A) and Evaskevich (James G) are among the top holder holding 4.3% and 3.3% stake in the company, respectively. Institutional Ownership in the company stood at 4.3%, and strategic holding stood at 14.67%. None of the top 10 shareholders reduced their stake in the company in recent time, which is noteworthy.

Valuation Methodology (Illustrative): EV to Sales 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: The group set its 2021 capital budget at CAD 60 million prior to the announcement of multiple COVID-19 vaccines when WTI prices hovered around US$ 45.00 /bbl. Recently, the general market tone has improved dramatically, with spot prices increasing more than 40%. If commodity prices maintain current levels, Yangarra expects to keep one rig fully utilized for the year.

Yangarra has drilled and completed four wells to date in 2021. Drilling and completion costs for these wells continue to track with its previous disclosure on well costs. The wells have been brought on production, and early indications are the wells meet area average type-curves. Also, Current oil prices ensure a higher IRR in 2021; also, the cash flow can grow very fast if the crude remains above US$50/bbl.

The group has maintained a decent margin profile over the past several quarters, barring the first two quarters of 2020, where COVID-19 posed some unprecedented challenges for the oil & gas industry. However, the group’s margin improved in the third and fourth quarter of FY20 as oil prices recorded a relief rally.

Source: Kalkine group, Refinitiv (Thomson Reuters)

Further, despite the recent price correction, its shares are hovering well above the crucial long-term support level of 200-day and 100-day SMA, implies long-term bullish trend is largely intact. Based on the technical analysis, the stock has support at CAD 0.83 level.

Therefore, based on the above rationale and valuation, we suggest a “Speculative Buy” recommendation on the stock at the closing price of CAD 1.02 on April 27, 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 April 27, 2021, after market close). Source: Refinitiv (Thomson Reuters)

 

*Recommendation is valid at April 28, 2021 price as well.

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