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 the Central Alberta region of Western Canada. It generates its revenue from the sale of crude oil and natural gas products.

Investment Rationale

• Robust Q3FY21 Performance: The company reported decent performance in the Q3FY21, with revenue surging by 90% to CAD 35.9 million from CAD 18.9 million in pcp and net income rose hugely to CAD 13.5 million compared to CAD 0.53 million in Q3FY20. The healthy performance was driven by an 83% improvement in average product prices and a 4% increase in production volumes.

Source: Company

• Sequentially Improving Operating Metrics: Given the strength of the business over the past few quarters, YGR maintained its pace and witnessed a spirited performance across its operating metrics. It is continuously working to grow its profile, supported by the higher average realization cost of the commodity. 

REFINITIV, Analysis by Kalkine Group

• Elevated Funds Flow from Operations: Due to excellent operational performance, the business generated higher fund flow from operations during the reporting period, which increased by CAD 14.1 million to CAD 24.1 million. The healthy performance was primarily boosted through improved production volumes and average product prices.

Source: Company 

• Clocking Higher Average Prices: The company earned a higher total average price during the three months ended September 30, 2021, compared to Q3FY20, as natural gas prices climbed by 50%, light crude oil prices increased by 71%, and liquid prices increased by 169%. When compared to 2020, the average sales price climbed by 83% during the reported period. Realizing increased commodity prices has been suitable for YGR. Natural gas prices are projected to rise as demand will be fueled by the approaching winter.

Source: Company

• Industry Beating Margins: Despite the turmoiled period due to the COVID-19 pandemic, the company maintained its pace and witnessed spirited performance across its profit margins. In addition, the management's solid determination helped them leap the industry median on many fronts in Q3FY21, which exhibits its competitive advantage within the industry. The chart below gives a glimpse of this. 

REFINITIV, Analysis by Kalkine Group

• Operations Guidance: During Q4FY21, YGR will drill and complete a four well pad in the Chedderville area and then commence the drilling of a fourteen well pad in West Ferrier, which are scheduled to be completed in early 2022. Going forward, we believe these projects will open up new and improved avenues for fresh cash flows.

Risks Associated with Investment 

The company's financial performance is linked mainly to the volatility in crude oil and natural gas prices. Further, given the higher debt contribution in the group's capital structure, it is also exposed to significant balance sheet risk. Moreover, the resurgence of a new variant of the coronavirus is throwing a lot of uncertainties. The company's operations and cash flows could be impacted if the government reinforce mandated lockdowns to counter its spread. 

Financial Overview of Q3FY21 (in CAD thousands)

Source: Company 

• Rise in Average Production: The company's average production in the reported period stood at 8,710 BOE/D (46% liquids), a 4% increase from 8,408 BOE/D in pcp.
• Higher Revenue: Its revenue in Q3FY21 increased enormously to CAD 35.9 million compared to CAD 18.9 million in the previous corresponding period. The rise was mainly due to the higher realization price of the commodities.
• Lesser Consolidated Expenses: The consolidated expenses decreased slightly to CAD 15.3 million in Q3FY21 from CAD 15.9 million in pcp. However, its production cost was higher, at CAD 4.6 million v/s CAD 3.7 million in pcp.
• Falling Finance Cost: YGR witnessed a decline in its finance costs to CAD 2.7 million from CAD 4.2 million in pcp.
• Eminent Net Income: On the back of the above-discussed rationales, the company could post a significantly higher net income of CAD 13.5 million compared to CAD 0.5 million in pcp.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, forming around 16.27% of the total shareholding. Gordon A Bowerman (Independent Director) and James G Evaskevich (President/CEO) hold the company's maximum interests at 4.46% and 3.48%, respectively. YGR's institutional ownership stood at 3.50%, and ownership of the strategic entities stood at 15.35%.

Source: Refinitiv

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 company reported strong financial results for the third quarter of 2021, with revenue increasing by 90% to CAD 35.9 million and net income growing substantially to CAD 13.5 million, up from CAD 0.53 million in the previous similar period. This strong result was primarily due to higher average realization prices for many commodities and increased production. The company's average production in the reported period was 8,710 BOE/D (46% liquids), up 4% over the same period in 2020.

YGR has built a considerable future drilling inventory and plans to expand it through drilling, geology, and strategic acquisitions. We think that these projects will generate new cash flows in the future. Furthermore, the business earned more robust fund flow from operations due to excellent operational performance, which is a critical positive. Moreover, the company's strong determination helped them leapfrog the industry median margins on numerous fronts in Q3FY21, demonstrating its competitive advantage within the industry. Therefore, based on the above rationales and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 1.47 on November 30, 2021. We have considered Gear Energy Ltd, Bonterra Energy Corp, etc., as the peer group for comparison.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on November 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on December 1, 2021, price as well.

Disclaimer

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