Bonavista Energy Corporation (TSX: BNP) is a Calgary-based independent producer of oil and natural gas. The company generates its revenue through the sale of oil and natural gas liquids.

Recently, the company announced that the Court of Queen's Bench of Alberta had issued an interim order to consider and vote upon a corporate plan of arrangement and Recapitalization Transaction. The proposed recapitalization would reduce the debt by ~CAD 482.6 million and cash interest payments by ~CAD 16 million, which is likely to enhance the company's overall financial position.

Q1FY20 Financial Highlights: BNP declared its quarterly results, wherein the company reported a 26% decline in the top-line to CAD 82.93 million, as compared to CAD 112.65 million in pcp. The decline was primarily attributable to the lower realization from total oil equivalent, which stood at CAD 15.55/ boe, down ~24% on y-o-y basis. However, the quarter witnessed stable total oil equivalent production of 66,805 boe/day, against 66,937 boe/day in a year ago. Cash costs stood marginally higher CAD 9.75/boe, from CAD 9.55/ boe in Q1FY19. Total expenses rose sharply to CAD 575.75 million, from CAD 123.75 million in pcp, due to a surge in depletion, depreciation, amortization and impairment costs coupled with a higher net finance cost. Net loss and comprehensive loss extended to CAD 456.78 million as compared to CAD 40,13 million in pcp. The company reported net capital expenditure of CAD 34.51 million, as compared to CAD 43.76 million in pcp. The group invested 40% of the capital invested in the Deep Basin core area and allocated ~CAD 11.5 million to drilling and completion activities, while CAD 1.9 million allocated to support capital. The company exited the quarter with total assets of CAD 2,081.05 million, while the current portion of long-term debt stood at CAD 843.98 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The revenue of the company depends upon the price volatility of the international crude oil prices and a fall in the crude oil prices would impact the company’s income and cash flows subsequently. The company has a high debt component which has lowered the financial flexibility of the company.

Stock Recommendation: The stock of BNP corrected big-time by ~52% and ~90% in the last three months and six months, respectively, amidst a relief rally in the crude oil prices. While most of the oil and gas producing companies reacted positively to the commodity price, BNP failed to attract investor’s interest due to the over-leveraged balance sheet and negative bottom line. The stock was hammered and currently trading at the lower band of its 52-weeks trading range of CAD 0.05 and CAD 0.87. On the valuation front, BNP stock is available at a lower level as compared to the industry median. The stock is trading at a forward EV/Sales multiple of 2.5x, which is in line Oil & Gas industry average of 2.7x. Due to a significantly higher loss and an overleveraged balance sheet, the Group might face challenges to fund its near-term operations. Hence, we prefer to remain on the sidelines and recommend a ‘Watch’ stance on the stock at the closing price of CAD 0.06 on June 25, 2020.

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

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