Touchstone Exploration Inc. (TSX: TXP) is an international upstream oil and gas company currently active in the Republic of Trinidad and Tobago. The group is primarily engaged in the exploration and the acquisition, development, and production of hydrocarbons in onshore reservoirs in Trinidad. The company holds interests in producing and exploration properties in southern Trinidad, which is approximately 90,000 gross acres of exploration and development rights.

Key Updates:

• Reported higher Operating Netback: In Q1FY22, the company reported its realized sales price of USD 83.55 /bbl, which grew by 59% on y-o-y basis. This has resulted in a growth in the operating netback. Operating Netback is calculated by adding of all input costs associated with bringing one unit of oil to the marketplace and deducting from the realization price earned by the company. Operating netback is normally presented on a per unit basis. Hence, higher the operating netback, higher the profitability. Notably, in Q1FY22, the company’s operating netback stood at USD 37.83 /bbl, as compared to USD 21.98/bbl in pcp.

• Rising Uncertainty likely to support Commodity Prices: Crude oil prices touched record highs during the month of June 2022, due to the ongoing geopolitical tensions which caused supply-chain disruptions coupled with record low oil inventory. Moreover, any added sanctions on Russia on crude oil export might lead to lower buying interest from the country, resulting in higher supply-demand mismatches. Hence, these factors might lead to elevated crude oil price in the coming months, which would subsequently benefit the company’s realization price.

• Positive Cash from operations: In Q1FY22, the company reported cash from USD 333 million, as compared to a cash outflow of USD 1,234 million in pcp, supported by higher funds from operations. This is expected to support the company’s overall liquidity position and is a key positive.

Risks associated with the Investment:

The company’s operations might be impacted due to lower commodity prices, currency volatility, high input costs on account of rising inflation, etc.

 Q1FY22 Financial Highlights      

Q1FY22 Income Statement Highlights (Source: Company Reports)

• In Q1FY22, the company reported its total revenue of USD 6.9 million, as compared to USD 4.3 million in pcp. The company reported higher petroleum sales volumes coupled with elevated commodity prices.
• The company witnessed a higher operating revenue along with a rise in the general & administration expenses. Meanwhile a higher net finance costs also remained as a drag. Earnings before income taxes stood at USD 0.6 million, as compared to a loss of USD 0.1 million in pcp.

• The company reported net loss of USD 0.2 million, as compared to a net loss of USD 0.4 million in pcp. Net loss was lowered due to lower earnings before income taxes coupled with higher income taxes expense.

  Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

Q1FY22, the company reported its cash conversion period of 117.1 days, which is lower than 127.1 days in Q4FY21. This indicates that the company is taking lower time convert its investments to cash flows. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Birchcliff Energy Ltd, ARC Resources Ltd etc. for this purpose. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of TXP at the last closing price of CAD 1.33 on June 17, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 17, 2022). Analysis by Kalkine Group

Technical Analysis Summary

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