Enerplus Corp

Enerplus Corp (TSX: ERF) produces and develops crude oil and natural gas assets in Canada and the United States. Majority of oil production is derived from the Williston and Waterfloods basins, with the Marcellus providing a significant portion of natural gas production.

Key highlights 

• Improvement in free cash flows: The Company reported free cash flows of CAD 47.8 million in Q3 2020, improved from CAD 23.8 million recorded in the previous corresponding period. Adjusted funds flow stood at CAD 83.1 million and exceeded its capital spending helped in generating free cash flow. The company expects to generate additional free cash flow in the fourth quarter, which is notable.

Source: Company 

• Ample liquidity:The Company remains in a strong financial position with significant liquidity. At the end of Q3 2020, the Company had total debt of CAD 513.3 million, cash of CAD 84.5 million and was undrawn on its USD600 million bank credit facility. The Company’s net debt to adjusted funds flow ratio was 1.0 times at quarter-end.

Source: Company 

• Positive guidance: The Company lifted its FY 2020 annual production guidance to 90,000 to 91,000 BOE per day, including 50,500 to 51,000 barrels per day of liquids. The Company’s 2020 North Dakota well program outperforming expectations helped the management in raising its production guidance. And for Q4 2020, the group expects production of 84,000 to 87,000 BOE per day, including 47,000 to 49,000 barrels per day of liquids. The group also shared its FY 2021 preliminary outlook, where based on the current commodity price environment, the Company expects production of 86,000 BOE per day.

Source: Company 

Financial overview of Q3 2020

Source: Company

• In Q3 2020 the Company registered a decline in Oil and Natural Gas revenue by 40% to CAD 191.9 million, compared to CAD 318.8 million in the previous corresponding period. The decrease in revenue was primarily due to lower realized prices because of lower demand from the COVID-19 pandemic and a reduction in production volumes due to the suspension of the drilling program in North Dakota and limited capital activity in the Marcellus.
• The Company reported negative EBIT of CAD 252 million in Q3 2020, against an EBIT of CAD 83 million in the previous corresponding period, primarily due to lower production and lower average realization price along with an asset impairment of CAD 256.8 million.
• Net loss in Q3 2020 stood at CAD 112.7 million, against a profit of CAD 65.1 million in the previous corresponding period. 

Risks associated with investment

The company operates in the exploration business of oil and gas therefore revenues are correlated to the oil and gas prices. Any volatility in oil and gas prices is likely to affect the group’s performance. Other factors which could impact their financial performance are like low demand for oil and gas, and financial risk on behalf of their hedged positions.

Valuation Methodology (Illustrative): Price to Cash Flow 

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

Stock recommendation

We believe the recent rise in the commodity prices indicate a demand revival within the oil and gas sector as the industrial and the manufacturing sectors are recovering gradually. All these dynamics would be beneficial for the company to liquidate its products. Further, the company has significantly lowered its capex to weather the challenges emerged because of coronavirus and maintained decent free cash flow. Also, oil price recovery has sent its shares higher, which are hovering in a bullish zone, with the stock closed above the crucial short-term as well as long-term support levels of 200-day, 100-day, 50-day, and 30-day SMAs, respectively. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 4.52 on January 18, 2021. We have considered ARC Resources Ltd, Crescent Point Energy Corp, Nuvista Energy Ltd etc. as the peer group for the comparison. 

1-Year Price Chart (as on January 18^th, 2021). Source: Refinitiv (Thomson Reuters)

Frontera Energy Corporation

Frontera Energy Corporation (TSX: FEC) is a Canada based exploration and production company. Its operations include exploration, development, and production of crude oil and natural gas reserves in South America. 

Key Updates:

• Technical indicators are showing bullish price trend: The stock of FEC closed at CAD 3.94 and made strong recovery from its recent low of CAD 2.005. The stock closed above the short-term and long-term simple moving averages (SMAs) of 30-days, 50-days, 100-days, 150-days and 200-days, indicating a bullish pattern.
• Improved cost-structure to support working-capital and liquidity: In the recent past, the company reported a lower production cost, transportation cost and a decline in the capital expenditure, which eventually supported the company’s working capital and overall liquidity. Production costs stood at USD 8.97/ boe as compared to USD 9.03/boe in Q2FY20, while transportation cost stood at USD 9.89/boe compared to USD 11.28/boe in Q2FY20.

           Source: Company Presentations

Q3FY20 Financial Highlights:

• FEC announced its quarterly results, wherein the company posted revenue of USD 152.760 million, significantly lower than USD 277.676 million in the previous corresponding period (pcp). The decline was primarily driven by net sales realized price, which stood at USD 36.31/boe, significantly lower than USD 53.21/boe in pcp.
• The group reported a lower loss from operations at USD 12.765 million, as compared to a loss of USD 18.897 million in pcp. The improvement was primarily supported by lower depletion, depreciation and amortization costs (USD 60.960 million versus USD 94.019 million), oil and gas operating costs (USD 82.873 million versus USD 130.775 million in pcp) and a decline in general and administrative expense (USD 10.539 million versus USD 18.476 million in Q3FY19).
• Net loss widened to USD 92.642 million, from USD 48.656 million in pcp, due to a higher other loss of USD 38.626 million versus USD 1.359 million in Q3FY19.
• The company reported cash and cash equivalents of USD 259.980 million, while total assets were reported at USD 1,865.465 million.

Risks: The company’s business is exposed to commodity price volatility; any large swing the crude oil prices would have a weigh on the group’s performance as well. 

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

In order to combat the lower crude oil prices, the group reduced its capex by ~69% till the mid of FY20 and suspended dividend payment, and its share buy-back program, which is likely to support the company’s liquidity in the coming days. The recent recovery oil and gas demand and price stability have led FEC to report improved performance on a sequential-quarter basis, and the group registered an improved oil and gas sales of USD 149.474 million in Q3FY20, higher than USD 81.701 million in Q2FY20, and operating EBITDA improved from USD 37.608 million in Q2FY20 to USD 52.113 million in Q2FY20. The stock of FEC appreciated ~14% and ~76% in the last one month and three months, respectively, due to improvement in the international crude oil prices and demand dynamics. We have valued the stock using Price to CF based relative valuation method and have arrived at a lower-double-digit upside (in percentage terms). For the said purposes, we have peers like Parex Resources Inc, Birchcliff Energy Ltd etc. Considering the aforesaid facts, price movements, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.94 on January 18, 2021.

1-Year Daily Price Chart (as on January 18^th, 2021). Source: Refinitiv (Thomson Reuters)

Mission Ready Solutions Inc

Mission Ready Solutions Inc (TSXV: MRS) manufactures and distributes leading defense and tactical solutions to prevent injuries and enhance the performance of military personnel, first responders and all who serve on the front lines by equipping them with the next generation of personal protective technologies. The Company derives approximately 97% of its revenues from customers and clients where the end customer is the US Department of Defense, law enforcement or private security.

Key Highlights

• Recently in September 2020, the group announced that, through its wholly-owned subsidiary, Unifire, Inc., the Company was awarded a total of 7 government contracts – for personal protective equipment consisting of disposable level 2 and level 3 isolation gowns (the “Isolation Gowns”) – with an estimated value of USD 127.88 million and a maximum value of USD 435.7 million to be fulfilled over a 12-month period.
• For the nine-months ended on September 30, 2020, the company reported gross revenues were CAD 62.44 million, an increase of CAD 54.72 million from CAD 7.72 million realized in the same period in 2019, a 709% increase. This is a direct result of the closing of the acquisition of Unifire and reporting the revenues of Unifire from April 2019.
• Net loss for nine months ended September 30, 2020 was CAD 2.48 million, a decrease of CAD 2.39 million from a net loss of CAD 4.87 million in the prior period. The decrease in net loss is mainly due to an increase in revenue and gross profit from the Unifire operations and a gain on the settlement of debt as discussed above.
• A volume spurt spotted in the stock, with the 5-day average traded volume was approximately 240% higher against the 30-day average traded volume.
• Further, the stocks is hovering in a bullish zone, with stock traded significantly above the long-term as well as short-term support levels, with Price/200day SMA ratio stood at 2.35x implies that the stock is trading far away from its long-term support level.

• Unifire is one of the six companies, globally, authorized to provide equipment and designated services under DLA’s SOE TLS program.

Insider’s Activity. Source: Refinitiv (Thomson Reuters )

• Insiders remained net buyer in 2020, indicates that they are bullish on the future performance of the company.
• The stock registered a new 52W high of CAD 0.33 on January 18, 2021 and closed at the 52w high only.

Key Risks

• The company Debt/Equity ratio is quite higher, given the company’s losses at operating levels, which possess a balance sheet risk for the company.
• Further, the 14-day and 9-day RSI is hovering in the steep overbought zone, implies that a potential consolidation can take place in the next few trading sessions.
• The earnings of the company depend upon its ability to locate suitable opportunities and to bring to market the proprietary products being developed by its research and development division. Competition may restrict the company’s share of the market, reduce rates of return and/or may reduce profit margins.

Financial Highlights: Q3FY20

Source: Company Filing

• The company’s gross revenues for the Q3FY20 was at CAD 20.15 million, an increase of CAD 15.19 million from CAD 4.96 million realized in the same period of FY19, a 306% jump on a YoY basis. The growth was primarily driven by the revenue recognized from the Unifire operations during the period.
• The gross margin was 13.32% for the period under consideration.
• Interest and bank charges also increased by CAD 0.36 million in Q3-2020 compared to Q3-2019.
• Total operating expenses were reduced by CAD 0.23 million in Q3-2020 compared to Q3-2019.
• Net loss for three months ended September 30, 2020, was CAD 0.84 million, a decrease of CAD 2.49 million from CAD 3.33 million in the prior year, a 75% decrease. The decrease in net loss is mainly due to the increased volume of revenue and a higher gross profit in Unifire’s operations.

Stock Recommendation:  The company has reported an improvement in its top-line performance in 9MFY20 and Q3FY20 when compared to the previous corresponding period. Also, the losses have narrowed down in the same period. However, outstanding debt is one critical risk associate with the company. Though the company has a scope that they could probably raise enough capital to shore up its balance sheet, if the need arose, as the total asset at the end of the September quarter was approximately CAD 32.66 million as compared to total liabilities of CAD 27.66 million.

Also, we believe that the lack of balance sheet strength is fairly discounted in the company’s valuation, as from the TTM EV/Sales ratio standpoint, MRS shares are trading at a steep discount against it peers multiple. MRS TTM EV/Sales ratio stood at 0.87x, whereas Peer’s Average EV/Sales multiple stood at 2.35x. However, the stock is hovering in a bullish zone with price significantly above its long-term, and short-term crucial support levels of 200-day and 50-day SMAs and stock is up approximately 340% on a YoY basis, implies a strong relative strength in the stock. Further, insiders remained net buyer in 2020. These indicate we can see a potentially significant financial performance improvement in the coming few quarters.

However, the company is exposed to balance sheet risk because of a higher amount of debt and negative numbers at the operating level. Despite certain crucial risk factors, we recommend a “Speculative Buy” recommendation based on the substantial top-line improvement, improved gross profit, narrowed losses both at operating and at the bottom-line level and bullish technical indicators at the closing price of CAD 0.33 on January 18, 2021. However, one should assess the individual risk appetite before going long on MRS, because volatility could be huge in either direction.

1-Year Price Chart (as on January 18^th, 2021). 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.