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. The Company has a diversified portfolio of assets with interests in 34 exploration and production blocks in Colombia, Ecuador and Guyana, and pipeline and port facilities in Colombia. 

Key Updates:

• Reported discovery of Light Oil and Gas Condensate: Recently, the company declared its integrated results from the Kawa-1 exploration well, offshore Guyana and reported that it has successfully discovered light oil in the Santonian and Coniacian and gas condensate in the Maastrichtian and Campanian at the Kawa-1 exploration well. This project was conducted along with the joint venture with CGX Energy Inc. This is expected to strong prospects from the Guyana and the integrated Kawa-1 well in the coming years.

• Growth in production: In Q1FY22, the company registered a higher production of 41,100 boe/day, as compared to 40,599/day in pcp. The growth was driven by the organic growth across the portfolio resulted from an increase in natural gas liquids, mainly in the VIM-1 block, light and medium crude oil, mainly in the Guatiquia block, and heavy crude oil, mainly in CPE-6 block, due to development wells drilled that occurred during second half of FY21.

• Management Update: On June 03, 2022, the company announced that its Mr. René Burgos Díaz was appointed to the position of the Chief Financial Officer from its previous post of Director with immediate effect.

• Robust Margins: The company reported improved EBITDA margin and operating margin of 55.3% and 37.6%, respectively, in Q1FY22, as compared to the industry median of 47.1% and 33.7%, respectively. This indicates that the company has better cost management and higher operational efficiency. Moreover, the company’s net margin was recorded at 40.1% in Q1FY22, higher than the industry median of 7.7%.
  

Risks associated with the investment:

 The company’s operation is highly dependent on crude oil prices and the demand from the industrial and manufacturing activities. A fall in the demand for crude oil and a decline in commodity prices would dampen the overall realization of the company.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• FEC announced its first quarter result, wherein the company posted higher revenue of USD 254.6 million, as compared to USD 184.7 million in pcp. The growth was driven by higher net realized price of USD 81.66/boe v/s USD 50.44/boe in pcp.
• The period witnessed higher Oil and gas operating costs along with a surge in General and administrative costs. Income from operations stood at USD 95.6 million v/s USD 51.5 million in pcp, thanks to the elevated revenue as mentioned above, partially offset by higher input costs.
• The company reported a net income of USD 101.9 million v/s a net loss of USD 12.6 million in pcp, thanks to higher income from operations and lower finance costs.

Valuation Methodology (Illustrative): P/CF based valuation

Analysis by Kalkine Group

Stock Recommendation:

In Q1FY22, the company reported its debt to equity of 0.37x, as compared to the industry median of 0.57x. This indicates that the company has a prudent capital management and better financial flexibility when compared to the industry median. The company continued to deliver strong performance results in Q1FY22, as a result of the substantive improvements made to the business since 2020 to streamline operations, implement efficiencies and capitalize on stronger oil prices. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Laredo Petroleum Inc, SilverBow Resources Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of FEC at the last closing price of CAD 11.89 on June 15, 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 15, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV 

   Technical Analysis Summary

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