Tourmaline Oil Corp.

Tourmaline Oil Corp. (TSX: TOU) is a Canadian energy company engaged in natural gas and crude oil acquisition, exploration, development, and production in the Western Canada Sedimentary Basin. The company produces light and medium crude, natural gas liquids, and conventional and shale natural gas.

Key Highlights:

• Reduction in total debt: TOU reported total debt of CAD 1,478 million in Q1FY21, significantly lower than CAD 1,954 million in Q4FY20. The decline has resulted in a higher financial flexibility coupled with lower finance costs. Moreover, the above also indicates prudent capital management.
• Impressive margin: Over the years, the company has reported a constant decline in input costs, supported by well-strategized cost efficiencies. Notably, in Q1FY21, the group reported a higher margin than its peers. Gross margin and EBITDA margin was recorded at 98.2% and 64.3%, respectively, in Q1FY21, as compared to the industry median of 58.1% and 42.3%, respectively. The group reported a net margin of 26.39%, significantly higher than the industry median of 5%.

• Improved Cash from operations: The company reported a strong growth in its cash from operations, which stood at CAD 750.129 million in Q1FY21, considerably higher than CAD 341.958 million in Q1FY20. The growth was supported by a net profit, as compared to a net loss in the previous corresponding period.
• New Acquisition: On June 11, 2021, the group reported the acquisition of Black Swan Energy Ltd. at a price consideration of approximately CAD 1.1 billion and the transaction is expected to close in the second half of FY21. With the above acquisition, the group is expected to generate 500,000 boepd of production by mid- 2022.
  

Q1FY21 Financial Highlights:

• TOU announced its full-year result, wherein the company posted total revenue of CAD 950.594 million, increased from CAD 669.638 million in the previous corresponding period (pcp). The increase was due to a higher income from commodity sales from production (CAD 996.035 million v/s CAD 525.649 million in Q1FY21).
• Total expenses reduced to CAD 606.172 million from CAD 710.367 million in pcp, due to lower Depletion, depreciation, amortization and impairment costs, partially offset by higher Operating cost and Transportation costs.
• Income from operations stood at CAD 344.422 million, as compared to a loss of CAD 40.729 million in pcp.
• The group reported a net income of CAD 250.423 million, as compared to a net loss of CAD 36.134 million in Q1FY20. The growth was primarily driven by higher income from operations coupled with a slide in the finance costs (CAD 14.324 million v/s CAD 15.915 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  Volatility in the crude oil and gas prices would affect the company’s income and cash flow. 

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

For FY21, the group expects total production of 434,000 boe/day, while cash flow from operations is expected at around CAD 2,460 million. Free Cash Flow is expected at CAD 1,164 million. Moreover, the group is expected E&P Capital Program of around CAD 1,260 million. The company’s operating costs, and general & administrative costs are in the downtrend, which is a key positive. Moreover, the company has a diversified revenue portfolio and have less dependence on a particular segment. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Energy) median on an NTM basis etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of TOU at the last closing price of CAD 32.49 on June 22, 2021.

One-Year Technical Price Chart (as on June 22, 2021). Analysis by Kalkine Group

ARC Resources Ltd.

ARC Resources Ltd. (TSX: ARX) is a Canada based energy-producing company which is engaged in the acquisition, exploration, development, and production of conventional oil and natural gas.  The company produces light, medium, and heavy crude, condensate, NGLs, and natural gas.

Key Highlights:

• Improved Financials: At the end of Q1FY21, the group reported a lower net debt of CAD 613.6 million as compared to CAD 1,079.7 million a year ago. A lower net debt is an indication of improved financial flexibility. Funds from operation per share have remained elevated since the last eight quarters, despite the current economic downturn, which is encouraging. Notably, funds from operation stood at CAD 0.77 per share in Q1FY21, climbed from 0.46 per share in pcp, supported by higher average realized commodity prices.

Source: Company Presentation

• Record production: In Q1FY21, the group reported a record high production of 170,430 boe/day compared to 151,783 boe/day in the previous corresponding period (pcp). The above indicates a revival in the demand dynamics on account of the gradual reopening of several economies across the globe. For FY21, the group expects its production to remain within the range of 290,000 to 305,000 boe/day.

Q1FY21 Financial Highlights:

• ARX announced its quarterly results, wherein the company posted Revenue from commodity sales at CAD 518.6 million, jumped from CAD 268.5 million in the previous corresponding period (pcp). The growth was primarily driven by higher crude oil prices at CAD 64.46/bbl, as compared to CAD 49.69/bbl in the previous corresponding period (pcp).
• Total expenses stood lower at CAD 183.0 million, v/s CAD 1,092.1 million in Q1FY20, due to a gain from reversal of Impairment amounting to CAD 112.6 million v/s a loss of CAD 740.0 million in pcp.
• Net income before income tax stood at CAD 234.7 million, as compared to a loss of CAD 721.6 million in pcp, supported by a reduction in total expenses as discussed earlier.
• The group turned profitable and reported a net income of CAD 178 million, as compared to a net loss of CAD 558.4 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The business operations are directly correlated to the crude oil and natural gas prices. Any volatility in commodity prices or change in demand dynamics would impact the company’s performance.

Stock Recommendation:

The group commands a higher margin than its peers and reported gross margin and EBITDA margin at 84.9% and 69.3%, respectively, in Q1FY21 as compared to the industry median of 58.1% and 42.3%, respectively. Net margin stood higher at 33.9% in Q1FY21, significantly higher than the industry median of 5%. Additionally, the group has lowered its capital expenditure to CAD 125.7 million, from CAD 169.8 million in Q1FY20, in order to retain the liquidity levels. On the valuation front, the stock is available at a price to cash flow multiple of 2.9x on an NTM basis, as compared to the industry (Energy) median of 4.6x. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of at the closing price of CAD 9.71 on June 22, 2021.

One-Year Technical Price Chart (as on June 22, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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