Bonterra Energy Corp. (TSX: BNE) is an oil and gas exploration company operating in the Western Canadian Sedimentary Basin. The company develops and produces crude oil, natural gas, and natural gas liquids. Bonterra operates in one industry and has only one reportable segment. Its assets consist of crude oil and natural gas assets.

Key Highlights:

• Increased expenses: The company witnessed an increase in the total expenses to USD 51.52 million in Q1FY22, as compared to the total expenses of USD 42.89 million in Q1FY21. The production expenses rose to USD 20.61 million in the reported period (Q1FY22) against the production expense of USD 16.71 million in the pcp, which pushed the overall expenses in Q1FY22. Also, the other expenses such as employee compensation, depletion, and depreciation increased in Q1FY22, which contributed to the overall increase in expenses.

• Lower liquidity profile: In Q1FY22, the company reported a quick ratio of 0.21x, which is lower than the industry median of 0.94x. The current ratio for the company during Q1FY22 was 0.21x which is also lower than the industry median of 1.02x. The lower quick ratio and current ratio is an alarming indication that the company is not capable to meet its short-term obligations falling within one year time, which can hamper the business operations of the organization.

Source: Refinitiv, Analysis by Kalkine Group

• Increase in royalties’ payment: For Q1FY22, the company saw an increase in the total royalties paid to USD 10.66 million in Q1FY22 against the total royalties paid amounting to USD 3.78 million in Q1FY21. The royalties as the percentage of revenue also increased to 11.6% in the reported period (Q1FYF22) against 7.7% in the pcp. Further, the royalties per boe (barrel of oil equivalent) rose to USD 8.91/ boe vs USD 3.53/ boe in Q1FY21. The increase in royalties paid reduced the overall revenue of the group which is a key negative.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported a reduced average BOE production per day to 13,287 BOE/ day during Q1FY22 as compared to the 11,909 boe/ day in the pcp. The group also reported increased expenses to USD 51.52 million in Q1FY22 against the overall expenses of USD 42.89 million in Q1FY21. Further, the rising royalties of USD 10.66 million in the reported period (Q1FY22) against the royalties of USD 3.78 million in pcp, also putting downward pressure on the net revenues, which is a concern for the group. During Q1FY22, the company took 38.6 days to convert its inventory into cash, which is higher than the industry median of 2.2 days, which is again a serious concern for the group on slow rotation of its cash held in the form of inventory. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is offered at 2.5x which is higher than the industry (energy) median of 2.0x, implying the stock is overvalued. We have considered  InPlay Oil Corp., Lucero Energy Corp., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock of BNE at the last closing price of CAD 12.85 on June 09, 2022.

One-Year Technical Price Chart (as of June 09, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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