Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Canada-based company which offers services in the areas of electricity, pipelines & liquids and retail energy. The Company’s segments include Electricity, Pipelines & Liquids and Corporate & Other.

Key Highlights

• An Income play: The company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting operational resilience and healthy cash flow generation. This dividend pay-out practice translates into an essential factor for regular income-seeking investors with a long-term horizon. Recently, the company declared the first-quarter dividend of CAD 0.4398 per share, an increase over the CAD 0.4354 paid in each of the four previous quarters, payable on March 1, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of 5.51%.

Source: Company

• Changing electricity generation portfolio: Today, the world is evolving for clean energy, and so the company. They are focused on expanding their renewable electricity generation capabilities; for this, they sold their entire Canadian fossil fuel-based electricity generation business for aggregate proceeds of CAD821 million, consisting of 12 coal-fired and natural gas-fired electricity generation assets generating approximately 2,300 MW.

Source: Company

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts. The matrix below gives a glimpse of this. To come out with more conclusive numbers, we took the company's average margins of the past ten quarters.

Source: Refinitiv (Thomson Reuters)

• Robust liquidity: The on-going steady performance of the company’s operations and constant upgrading in the strength of its balance sheet resulted in total liquidity of CAD 3.93 billion, including a cash balance of CAD 890 million, while the group had available credit limit of CAD 2.26 billion.

• Event Update: The company will release its financial results for the year ended December 31, 2020 on Thursday, February 25, 2021.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted revenue of CAD 727 million, against CAD 885 million in the previous corresponding period. The decline in revenue was primarily due to timing of settlements related to regulatory decisions, the completion of the PBR efficiency carry-over mechanism (ECM) funding at the end of 2019, and the transition to APL operating activities by Electricity Transmission with the completion of project management construction activities in 2019. Lower revenues were partially offset by growth in the regulated rate base.
• Operating profit stood at lower side to CAD 216 million in the reported quarter against CAD 464 million in pcp, primarily due to lower revenue, coupled with higher depreciation.
• Earning for the period were CAD 93 million against CAD 286 million in Q3 2019, the decline in net income was primarily due to above stated reasons.

Risks associated with investment

The company is exposed to many risk factors that, alone or cumulatively can affect its operations and financial health. Some of the risks include the supply of and demand for energy, Realization prices, exchange rates, inflation, and interest rates. A prolonged economic downturn could adversely impact customers, contractors, and suppliers' ability to fulfil their obligations and could disrupt operations and financial health.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The utility segment is likely to remain stable in the coming quarters, as the sector is categorized under "essentials" and the business expects to benefit from the improving realization prices. The company has a concrete financial strength, with a cash of approximately CAD 890 million as on September 30,2020, and unused credit facility of CAD 2.26 billion. Furthermore, the industry-beating margins of the company reflect the resiliency of the business. Also, a consistent dividend-paying company, with a dividend yield of more than 5% is like a big yes to the investors seeking quality for the long-term horizon. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 31.69 on February 19, 2021. We have considered Canadian Utilities Ltd, Emera Inc, TC Energy Corp, etc. as a peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Canacol Energy Ltd.

Canacol Energy Ltd. (TSX: CNE) is a Canada-based oil and gas exploration and production company. The Company is engaged in petroleum and natural gas exploration and development activities in Colombia and Ecuador.

Key highlights 

• An Income Play: The group continues with a track record of dividend distribution and recently, paid a quarterly dividend of CAD 0.052 per common share on January 15, 2021. Moreover, at the last traded price, the stock was offering a healthy dividend yield of 5.73%, which is lucrative considering the current macros and interest rate environment.

• Capex and gas sales guidance:The Corporation announces that its 2021 capital budget is USD 140 million, which would be fully funded from existing cash and 2021 cash flows. The group intends to keep the two drilling rigs currently under contract through 2021 to execute the exploration and development drilling programs, ensuring sufficient production capacity to meet its rapidly expanding forecast gas sales in the years ahead. The group shared high-end guidance of 190 MMscfpd, at an expected average wellhead price of USD4.10/mcf to USD4.50/Mcf.

Source: Company 

Operational update: Recently, the company reported its operational updates wherein it Realized contractual natural gas sales of 177 million standard cubic feet per day for the month of January 2021. The group spud the Flauta 1 exploration well and the Oboe 2 development well in January 2021, both these wells are targeting gas within the Cienega de Oro (“CDO”) sandstone reservoir.

New member on “Board”: Recently, the company has appointed Mr. Juan Argento to the Board of Directors.  

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the group posted muted growth in revenue at USD 64.4 million as compared to USD 63.6 million in the previous corresponding period. The increase was primarily due to the pipeline expansion in late Q3 2019.
• Operating Income Before Tax stood at USD 14.8 million in Q3 2020, as compared to USD 20.9 million. Operating income dropped mainly due to higher operating expenses, higher G&A expenses along with higher depreciation and other costs.
• Net income posted by the company in Q3 2020, stood at USD 2.6 million as against 0.6 million in the previous corresponding period. 

Risks associated with investment

There are many risks involved with the company which can create a massive impact on the operations and financial health, such as fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, volatility in the prices of commodities, the impact of weather and seasonal conditions on operations and facilities, etc. 

Valuation Methodology (Illustrative): Price to Cash Flow 

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The energy industry continues to have a challenging outlook as the COVID-19 pandemic has resulted in significant global oil supply imbalances and near-term crude oil price volatility. We believe, the trend is likely to improve in the coming days as the Oil industry is likely to return to normalcy with a gradual recovery in demand.  The group expects on achieving a mark of 190 MMscfpd, at an expected average wellhead price of USD4.10/mcf to USD4.50/Mcf, along with a capital budget of USD 140 million, which will be fully funded from their existing cash and FY2021 cash flows. The Company also anticipates exiting FY2021 with a healthy cash position of approximately USD 35 million, with a debt reduction of USD 12 million that would help in maintaining a net debt to EBITDAX leverage ratio of 1.7x. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 3.63 on February 19, 2021. We have considered Parex Resources Inc, Peyto Exploration & Development Corp, Viper Energy Partners LP, etc. as a peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.