Journey Energy Inc (TSX: JOY) is engaged in the exploration, development, and production of crude oil and natural gas in Alberta province. The group derives its revenue from petroleum and natural gas sales including marketing of crude oil, natural gas and natural gas liquids, etc.

Why Should Investors Book Profit?

• Macro scenario looks ambiguous: The reappearance of Delta variant cases might further lead to imposition of lockdown restrictions, quarantine periods, social distancing, and travel bans, which might result in material disruption to businesses. The above would result to supply-demand mismatches coupled with volatility in international crude oil and natural gas prices causing impact to the company’s realization prices and revenue.

• Lower profitability margins: The company reported weak margin as compared to its peers, wherein EBITDA margin and operating margin were recorded at 36.1% and 9.7%, respectively in Q2FY21, as compared to the industry median of 43.4% and 21.1%, respectively. Moreover, the company posted a negative net margin of 1.4% in Q2FY21, as compared to the industry median of 3.9%.

• Rise in input costs: In Q2FY21, the company witnessed higher input costs, wherein operating costs and general and administrative costs surged to CAD 13.010 million and CAD 1.039 million, respectively, as compared to CAD 8.684 million and CAD 0.471 million in pcp. Continuation of the above trend would dampen the company’s margins and profitability in the coming quarters.

• Technical chart showing a possible price correction: The stock of JOY closed at CAD 1.49, which is close to the upper band of the 20-days Bollinger band range. Closer to the upper band of Bollinger band range results in a price fall due to profit booking.

Stock Recommendation:

Despite a higher crude oil and natural gas prices, the company reported net loss in Q2FY21, which remains a major concern for the company, as it would lead to higher accumulated deficit for the company. Moreover, finance costs rose tremendously to CAD 10.386 million in H1FY21, as compared to CAD 6.565 million in pcp. The company is also combating with its liquidity and posted current ratio of 0.80x, significantly lower than the industry median of 0.98x. Considering the above factors, profitability, recent price action and rising expenses, we give a ‘Sell’ rating on the stock of JOY at the last traded price of CAD 1.49 on September 30, 2021.

Source: REFINITIV, Analysis by Kalkine Group

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