Seven Generations Energy Ltd

Seven Generations Energy Ltd. (TSX: VII) is a Canada-based energy producer, focuses on exploration, development and production of oil and natural gas properties in western Canada. The company employs long-reach and horizontal drilling to produce resources of natural gas, condensate, and natural gas liquids. 

Key highlights

Improved guidance: The company has raised its full-year 2020 production guidance of 180-185 Mboe/d, compared to its prior guidance of 175-185 Mboe/d, keeping capital investments unchanged at CAD650 million. Additionally, the upper end of full-year 2020 operating cost guidance has been reduced from CAD4.50-CAD5.00/boe to CAD4.50-CAD4.75/boe. For FY21 company expects the same production numbers.

Source: company

Operational excellence: The company is pursuing innovations that drive long-term improvements to the business and free cash flow. The group is bringing down the drilling costs, completion costs, and operating costs regularly.

Source: Company

Liquidity: In Q3 2020 the Company had available funding of CAD 1.1 billion, primarily consisting of undrawn credit facility capacity maturing in 2024. The Company had net debt of CAD 2.18 billion in its books with approximately half of the company's senior notes maturing in 2023 and the remaining half maturing in 2025. In the near term, the group is focusing on the reduction of net debt with available free cash flow which would help in bringing down the interest cost and higher margins. 

Financial overview of Q3 2020 (millions of Canadian dollars, except per share amounts)

Source: Company

• During Q3 2020, Seven Generations recognized revenue of CAD 568.9 million in liquids and natural gas sales, a decrease of CAD 111.3 million compared to CAD 680.2 million in Q3 2019. The decline was due to lower commodity realized prices and lower volumes.
• The realization cost of Condensate stood at CAD 47.40 in Q3 2020 as against CAD 65.59 in Q3 2019.
• Loss before tax reported by the company in Q3 2020 stood at CAD 100.2 million against a profit of CAD 127 million in the same period a year ago.
• The company reported a net loss of CAD 66.8 million against a profit of CAD 85.1 million in the same period a year ago. 

Risks associated with investment

As the company is in exploration business of oil and gas, hence its revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors which could impact their financial performance are like low demand for oil and gas, and financial risk on behalf of their hedged positions.

Valuation Methodology

 All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The company’s future looks optimistic as the management has raised its full-year 2020 production guidance to average 180-185 Mboe/d, compared to its prior guidance of 175-185 Mboe/d, keeping capital investments unchanged at CAD 650 million. While the current operating environment presents significant challenges for the Canadian oil and natural gas industry, the company remains well-positioned to navigate through the current challenging environment. The company has available funding of CAD 1.1 billion, which seems sufficient enough to meet the near-term requirements. In the near term, the group is planning to reduce its debt with available free cash flow which will help in bring down the interest cost and enhance the margins. Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 5.14 on November 10, 2020. We have considered Paramount Resources Ltd, Tourmaline Oil Corp, Whitecap Resources Inc etc., as the peer group for the comparison.

VII daily technical chart. Source: Refinitiv (Thomson Reuters)

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