Frontera Energy Corporation

Frontera Energy Corporation (TSX: FEC) is an oil and gas company that is engaged in the exploration, development and production of crude oil and natural gas in South America.

To weather the current crisis, FEC is focusing on streamlining corporate overhead costs and optimizing its workforce in order to preserve financial flexibility. The Company has suspended its FY20 Guidance due to the persisting uncertainty on account of COVID 19.

Q1FY20 Financial Highlights: Frontera reported a shrinking top-line and bottom-line, as the performance was hindered by significantly lower crude oil prices, resulting in a fall in margins. Revenue, during the quarter, stood at USD 236.94 million, lower from USD 377.53 million in Q1FY19. The quarter was marked by a drastic increase in oil and gas operating costs due to high inventory valuation expense. Loss from operations stood at USD 215.12 million, as compared to an income of USD 51.29 million in pcp, due to inclusion of impairment, exploration expense (~USD 148.5 million). Oil production during the quarter, stood at 61,535 bbl/day, lower from 65,323 bbl/day during Q1FY19. Production costs and transportation costs were higher than the previous corresponding quarter, which took a toll on profitability. The Company reported a net loss of USD 386.14 million, as compared to a profit of USD 49.57 million in pcp. The Company exited the quarter with a cash position of USD 361.3 including USD 96.3 million of restricted cash and total assets amounting to USD1,864.40 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of FEC corrected ~71% so far this year due to falling crude oil prices and demand-supply mismatch resulting into higher inventory levels for the crude oil producers followed by a production cut. To weather the current situation, the group has reduced its FY20 capital expenditure and likely to invest in the range of US$ 80 - 100 million. The group is planning to reduce its FY20 general and administrative expense by US$ 30 - 35 million by reducing the headcount and salary reduction. The group seems to have ample liquidity with cash and cash equivalent of USD 361 million, and there is no debt payment due till 2023. The group is also targeting to reduce its production cost by US$ 100 million and transportation cost by US$ 30 million. The group has temporarily shut-in its production but does not expect the shut-ins to affect future field performance and is planning to reactivate the shut-in production once market conditions improve. We expect the demand for crude oil to recover gradually as governments across the globe are easing the lockdown restrictions and industrial activities are started to resume. The stock is currently trading at a forward price to cash flow multiple of 1.2x against the industry (oil and gas) average of 2.7x. Considering the current trading levels, volatility in oil prices and abovementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 4.02 on May 21, 2020.

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

Trican Well Service Ltd.

Trican Well Service Ltd. is an oilfield services company, located within the province of Alberta, Canada. The Company provides a comprehensive array of specialized products, equipment, services and technology for use in the drilling, completion, stimulation and reworking of oil and gas wells.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, TCW came up with a sluggish set of numbers, wherein the Group posted a lower revenue of CAD 191.79 million, dipped from CAD 237.59 million in pcp. The quarter was marked by relatively flat drilling rig count and a significant drop in operations in the second half of March 2020 on account of COVID 19 pandemic. Further, the Company slashed its crewed complement in cement and hydraulic fracturing services in order to synchronized with equipment and fixed cost infrastructure levels to annualized activity levels.  Gross profit declined to CAD 3.75 million, as compared to CAD 9.56 million in the previous corresponding quarter due to a lower income, partially offset by lower cost of sales. Loss from operating activities widened to CAD 161.51 million from CAD 3.64 million in the previous corresponding period, primarily attributable to inclusion of impairments on non-financial assets amounting to CAD 141.06 million and impairment on trade receivable of CAD 10.57 million. Loss from continuing operations stood at CAD 154.48 million, as compared to a loss of CAD 4.09 million in Q1FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The group’s offerings are categorized as essential services which would help the cash flow ticking for the Company. However, the revenue of the Company is co-related with the crude-oil demand and market dynamics of the crude oil prices. The oil producers are witnessing a sluggish demand due to the persisting oversupply situation and hence, significantly reduced their FY20 capex planning. The group is anticipating a ~60% drop in the industry activity during the latter part of the financial calendar, which is expected to hit the income and cash flow in the near term. However, the Company is witnessing a stable realization price from the natural gas segment, which is expected to support the cash flow to a limited extent. Further, the Company’s Hydraulic Fracturing and Cement and Coiled Tubing businesses are operating at a lower capacity which is likely to build pressure on the cash flows. The group mentioned that WCSB rig count has dipped below historically low levels in Q2, which is likely to take a toll on the operating metrics. The group is offering its services at a very low price, and the group will not be able to offer further price reduction and would prefer to park its equipment fleet to safeguard the cashflow. The stock rebounded in the last five trading sessions, generating a ~31% return on account of a relief rally in the crude oil prices. Despite a short-term appreciation in the stock price, we are skeptical about the group’s performance in the near term. Further, the stock of TCW is quoting at a forward price to cash flow multiple of 18.7x, higher than the industry (Oil & Gas related Equipment Services) average of 4.5x. Hence, we recommend a ‘Watch’ stance on the stock of TCW at the closing price of CAD 0.75 on May 21, 2020.

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

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