Should Investors Book Profit on this Energy Stock - Advantage Energy Ltd.

Advantage Energy Ltd. (TSX: AAV) supplies clean, affordable, reliable, and sustainable Canadian energy to power the needs of Canada and the world.

Key Updates:

• Weak liquidity profile: In Q3FY21, the company reported its current ratio of 0.66x, as compared to the industry median of 1.04x. This indicates that the company’s current assets are not sufficient to fund its current liabilities. This might lead to a liquidity concern and is a key concern for the group.

• Lower crude oil production: In Q4FY21, and FY21, the company reported lower crude oil production of 816 bbl/day, and 1,101 bbl/day, respectively, as compared to 1,653 bbl/day and 1,664 bbl/day in Q4FY20 and FY20, respectively. Continuation of the above trend might lead to weak operational metrics.

• Increase in input costs: In FY21, the company reported an increase in input costs like operating expense (CAD 0.044 million v/s CAD 0.040 million in FY20), Transportation expense (CAD 0.070 million v/s CAD 0.055 million in FY20) and General and administrative expense (CAD 0.019 million v/s CAD 0.011 million in FY20). This indicates poor cost management and continuation of the above trend might lead to lower profitability and poor margins.

Valuation Methodology (Illustrative): Price to Cash Flow based

Analysis by Kalkine Group

Stock Recommendation:

In FY21, the company reported G&A/Finance Expense of CAD 2.20/boe, which exceeded the company’s guidance of 2.00. Hence, this remains a major drawback for the company and continuation of the above trend would lead to margin shrinkage. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Enerplus Corp, ARC Resources Ltd etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of AAV at the last closing price of CAD 8.44 on March 25, 2022.

One-Year Technical Price Chart (as on March 25, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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