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 has a track record of dividend distribution and continues with it despite a challenging operating environment. The company announced a quarterly dividend of CAD 0.052 per common share payable on 15^th January 2021, with a record date of 31^st December 2020. At the last traded price, the stock was offering a healthy dividend yield of 5.29%, which is lucrative considering the current interest rate environment.

• Capex and gas sales guidance:The Corporation announces that its 2021 capital budget is USD 140 million, which will 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 

• Shares buyback:The management is showing extreme confidence in the operations of the group. As a result, during the nine months ended September 30, 2020, the group repurchased 823,723 common shares of the Corporation at the cost of USD 2.3 million, including transaction fees. Subsequent to September 30, 2020, the Corporation repurchased 982,800 common shares of the Corporation at the cost of USD 2.6 million, including transaction costs. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the group posted muted growth in revenue at USD 64.47 million as compared to USD 63.65 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 17.47 million in Q3 2020, as compared to USD 20.93 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 has a challenging time as the COVID-19 pandemic 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 mentioned that it is having 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 USD35 million, with a debt reduction of USD 12 million will help in maintaining a net debt to EBITDAX leverage ratio of 1.7x. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Speculative Buy” rating at the closing price of CAD 3.93 December 18, 2020. For the said purpose, we have considered peers like Parex Resources Inc, Peyto Exploration & Development Corp, Viper Energy Partners LP, etc.

Source: Refinitiv (Thomson Reuters)

Tidewater Midstream and Infrastructure Ltd

Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) is a Canada-based company within the midstream and infrastructure industry. The company is engaged in natural gas processing, fractionation, liquids upgrading, storage and transportation, and marketing.

Key highlights

• An Income Play: The group has a track record of consistent dividend distribution. At the last traded price, the stock is offering a lucrative dividend yield of 5.06%, which is decent considering the current interest rate environment.
• Stripping stake at Pioneer Pipeline: The company intends to sell the Pioneer Pipeline to ATCO for gross proceeds of CAD 255 million and anticipates getting regulatory approval in Q1 2021. Net cash proceeds from this transaction will be approximately CAD138 million which is likely to be used for debt reduction to bring down Net Debt to annualized Adjusted EBITDA ratio within the target range of 3.0x to 3.5x
• The bullish stance of management: The management is positive on future performance. The company has shared guidance regarding Adjusted EBITDA, which would be in a range of CAD 175 million to CAD 185 million for the full year 2020, looks impressive.
• Higher utilization achieved: In Q3 2020, the company’s Prince George Refinery (“PGR”) reached over 95% utilization, approximately by 12.6% higher as compared on the sequential basis, due to increased demand for refined products and planned maintenance program executed by the group in Q2 2020.

Financial overview of Q3 2020

Source: company

• The Company delivered revenue of CAD 273.4 million, an increase of CAD 126.4 million over CAD 147 million in the previous corresponding period, primarily due to strong utilization seen by (“PGR”).
• Adjusted EBITDA stood at CAD 47.6 million, increase by 86% in Q3 2020, as compared to CAD 25.5 million in Q3 2019, as a result of the robust performance of the (“PGR”) and the Pipestone Gas Plant.
• In Q3 2020, the Company posted a Net loss attributable to shareholders of CAD 2.0 million as compared to net income of CAD 11.0 million in the previous corresponding period. The decrease in net income was a result of a non-cash loss on disposition of certain non-core assets.
• The Company reported positive net cash flow from operating activities of CAD 64.0 million in Q3 2020. 

Risk associated with investments

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the lower demand for crude oil and natural gas, lower production, prices of these commodities as the low realization prices will dampen their top line, inflation, interest rates etc.

Valuation Methodology (Illustrative): Price to cash flow

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

Stock recommendation

The company managed to bring the volumes across its operations to pre-pandemic level successfully and foresee an increased demand at “PGR” since large infrastructure projects in central and northern British Columbia resulting in a more robust market for refined products. The company is likely to receive approximately CAD 138 million in Q1 2021, from divesting its stake in Pioneer Pipeline. The company would utilize the proceeds to bring down the net debt. The company also expects to garner Adjusted EBITDA in a range of CAD 175 million to CAD 185 million for the full year 2020. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 0.79 as on December 18, 2020. We have considered Tamarack Valley Energy Ltd, Martin Midstream Partners LP, Keyera Corp, etc. as the peer group for the comparison.

1-Year Price Chart (as on December 18, 2020). 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.