Seven Generations Energy Ltd. 

Seven Generations Energy Ltd. (TSX: VII) is an independent energy company focused on the acquisition, development, and optimization of high-quality, tight rock, natural gas resource plays. The company employs long-reach and horizontal drilling to produce resources of natural gas, condensate, and natural gas liquids.

Q1FY20 Financial Highlights: Seven Generations Energy announced its quarterly results, wherein the Company reported total revenue of CAD 989.4 million, as compared to CAD 546.3 million in the previous corresponding period (pcp). The increase was driven by unrealized gain amounting to CAD 337.9 million, while lower income from the Natural gas segment remained a drag. The quarter was marked by the inclusion of impairment loss amounting CAD 1,442.6 million, higher transportation, processing and other expense, increase in product purchases costs and a foreign exchange loss of CAD 193.8 million. Finance expense and general and administrative expense, during the quarter, stood slightly higher than the previous corresponding quarter. As a result, the company reported a net loss and comprehensive income of CAD 1,009.2 million against a net income of CAD 10.8 million, a year ago. The Company ended the quarter with cash and cash equivalents of CAD 13.6 million, while total assets stood at CAD 7,422.7 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company’s business is exposed to natural gas prices, and the demand is directly correlated with the demand from the manufacturing and industrial sectors. The recent lockdown has dampened the realization price of the commodities. Any setback to lockdown easing or further breakout of the novel virus would hamper the demand for oil and natural gas, thereby impacting the group’s performance.

Valuation Methodology: P/CF Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of VII corrected ~61% so far this year due to soft commodity prices and lower demand from major industries. To weather the current downturn and the falling commodity price, the company made prudent steps to protect its liquidity and lowered its capital budget by CAD 200 million for FY20, which augurs well to retain the continuity of business by supporting the working capital needs. Furthermore, the company has ample liquidity apart from funds from operation. Credit Facility capacity stood at CAD 1,116.3 million as on March 31, 2020 with earliest debt maturity date is May 2023, which seems sufficient to sail through the difficult times. Further, the company has suspended its share buyback program and increased its liquids and foreign exchange hedges for the remainder of 2020. The stock appreciated ~44% in the last three months due to a price revival in the crude oil and natural gas market. At the last trading price, the stock is trading at the lower band of its 52-week trading range of CAD 9.57 and CAD 1.15. We have valued the stock using P/CF based relative valuation approach and considered industry (energy) median on NTM basis and arrived at a target price offering double-digit upside potential (in % terms). Hence, considering the aforementioned facts and risks, we recommend a ‘Speculative Buy’ on the stock at the current market price of CAD 3.29 as on July 14, 2020.

VII Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

NexGen Energy Ltd.

NexGen Energy Ltd. (TSX: NXE) is a mineral exploration company, which acquires, explores for uranium properties in Canada. The Company's projects portfolio consists of ROOK I, Radio Property, and the IsoEnergy, at the Athabasca Basin

Key Highlights:

• The Completed USD 30 million of funding from Queen's Road Capital Investment Ltd. which constitutes USD 15 million of common shares through private placement and USD 15 million aggregate principal amount of unsecured convertible debentures. The above proceeds would be used to the fund the permitting and development for Rook I Project.
• Earlier, the Management announced the appointment of Tony George to the position of Chief Project Officer. Tony had joined the Company from mid-June 2020.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, the Company reported a loss from operations at CAD 12.833 million as compared to a profit of CAD 7.053 million in the previous corresponding period (pcp). The quarter was marked by higher salaries, benefits and directors’ fees, increase in office and administrative expense, higher mark to market loss. This was partially offset by foreign exchange gain, lower travel and depreciation expenses and a slide in the professional fees. The Company reported a net loss of CAD 10.386 million as compared to a net profit of CAD 6.98 million in pcp. The Company reported a cash balance of CAD 43.942 million, while total assets were recorded at CAD 314.044 million at the end of March 31, 2020. The Company is in the initial stage of its operations and is yet to report its revenue.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company is focused on permitting and development activities of the Company's Rook I Project, which has been delayed due to the ongoing restriction on account of COVID 19. Any further delay in the timeline would dent the operating prospects.

Stock Recommendation: The stock appreciated ~28% in the last three months and currently trading above its 200-days simple moving average (SMA) of CAD 1.61. The company is yet to report revenue and indulged in permitting and development activities of the Rook I Project. We believe it is too early to estimate the outcome of the project in terms of revenue generations. The company is entirely backed with third party funding which remains as a setback for a while. Uranium is used for nuclear power stations and has a stable demand, which is a key positive. However, the business prospects can be accessed once the company commenced its production, received orders from other business etc. Despite a decent price gain in the recent past, lack of growth drivers took us to the sidelines. Hence, looking at the current price movement, delay in the filling process, we recommend a ‘Watch’ stance on the stock at the closing price of CAD 1.84 on July 14, 2020.

NXE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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