Frontera Energy Corporation (TSX: FEC) is a Canadian-based company engaged in the exploration, development, and production of crude oil and natural gas reserves in South America, including related investments in both upstream and midstream facilities.   

Key Highlights:

• Increased production: For Q1FY22, the company reported an increase in the total production of 41,100 boe/d (barrels of oil equivalent per day) as compared to 40,599 boe/d in Q1FY21. The heavy crude oil production (contributing 51.6% to the total revenue) rose to 21,214 bbl/d in Q1FY22 against 20,997 bbl/d in Q1FY21. The Natural gas liquids also saw a surge in the total production to 966 boe/d in the same period (Q1FY22) as compared to 391 boe/d in Q1FY21.   

• Higher operating EBITDA: The company witnessed an increase in the operating EBITDA of USD 132.77 million in Q1FY22 against the operating EBITDA of USD 69.158 million in Q1FY21. Because of the Net income of USD 102.22 million in Q1FY22 as compared to the net loss of USD 14.12 million in Q1FY21, and income tax recovery in the same period (Q1FY22) helped the company to attain higher operating EBITDA.

• Improved liquidity: During Q1FY22, the group reported an increase in the cash and cash equivalent to USD 257.37 million as compared to the cash and cash equivalent balance of USD 248.23 million in Q1FY21. Further, the group's cash flow from operation also increased to USD 114.98 million during Q1FY22, as compared to USD 47.39 million in Q1FY21. The increased liquidity is essential for the group to meet its operating expenses as well as to carry out the strategic growth objectives.

• Industry beating profitability margins: In Q1FY22, the company witnessed an increase in the revenues, which were on account of higher production and higher net sales realized prices, helped the company in attaining higher profit margins as compared to the industry median, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group    

Risks associated with investment

The group is majorly exposed to volatility in the energy prices and any sustained decline in the prices of oil, natural gas, etc can hamper the revenues. Few other risks such as currency volatility, the decline in demand because of economic slowdown, etc. are lingering on the business. 

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing 

• The group reported an increase in total revenues to USD 254.62 million in Q1FY22 as compared to USD 184.73 million in Q1FY21. The increase in production along with the rise in the net average realized sales prices helped the company to clock the higher revenues in Q1FY22.

• During Q1FY22, the income from operations increased to USD 95.67 million vs the income from operations of USD 51.54 million in Q1FY21. The increase in oil and gas operating costs in Q1FY22 to USD 104.04 million vs USD 91.31 million in Q1FY21, pushed the overall expenses higher, resulting in a limited rise in income from operations in Q1FY22.

• The group reported net income of USD 101.98 million in Q1FY22 as compared to the net loss of USD 12.60 million in Q1FY21.
  

Valuation Methodology (Illustrative): Price to Cash flow-based

Analysis by Kalkine Group

Stock Recommendation:

The company reported an increase in the total revenue to USD 254.62 million during Q1FY22 against USD 184.73 million in Q1FY21, which was majorly driven by the higher net sales realized prices in Q1FY22. The company transitioned into a net income of USD 101.98 million from the net loss of USD 12.60 million in Q1FY21, also the operating EBITDA rose to USD 132.77 million vs USD 69.15 million in Q1FY21. The management is having a positive outlook for FY22 and estimated the operating EBITDA in the range from USD 575 million to USD 625 million keeping Brent oil at USD 90/ bbl.  On the valuation front, the stock is measured on the Price/ Cash flow-based multiple and the stock is currently trading at 1.6x as compared to the industry (energy) mean of 4.2x, suggesting the stock is still undervalued. We have considered Laredo Petroleum Inc., Gran Tierra Energy Inc., etc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of FEC at the last closing price of CAD 13.81 on May 25, 2022. Additionally, the 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 of May 25, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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