NuVista Energy Ltd

Successful First Quarter with Strong Balance Sheet: NuVista Energy Ltd (TSX: NVA) is engaged in the exploration, development, and production of oil and natural gas. As on 15 May 2020, the market capitalization of the company stood at CAD169.19 million.

Quarterly Financial Performance (For the Period Ended 31 March 2020): During the first quarter ended 31 March 2020, NuVista produced 52,080 Boe/d, in-line with its guidance range of 50,000-54,000 Boe/d and 19% higher than the same period in 2019. During the three months ended 31 March 2020, NuVista executed a very busy and successful winter drilling of 15 new wells and completion programs with outperforming expectations in costs and timings. In the same time span, NVA achieved adjusted funds flow of CAD50.9 million and executed a successful quarter with capital expenditure program of CAD129 million including the drilling of 18 wells. During the quarter, the company maintained a strong balance sheet with credit facility capacity of CAD550 million, providing financial flexibility and significant cushion against market volatility. 

Quarterly Financial Highlights (Source: Company Reports)

Future Expectations and Growth Opportunities: The company stated that all its major project milestones are on budget and schedule.  It expects that the capacity for first phase of the compressor station will be approximately 12,500 Boe/d. NuVista expects to continue to have sufficient liquidity cushion in the extreme market volatility. The company is very well-hedged for 2020 and expects the positive revenue impact of approximately CAD82.5 million for FY20 in the oil and gas hedges. The company expects capital spending to be in the range of CAD165 - CAD175 million for 2020. It is also focused on maximizing the economic value of its production. However, the uncertainty around oil prices and curtailment might pose some near-term uncertainty.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: NuVista has quality assets and a management team focused on relentless improvement. The company has a strong balance sheet with sound liquidity position and thus have the necessary foundation to weather the storm of global pandemic. The stock of NVA is trading at attractive levels, thus, proffering a decent opportunity for the investors to enter the market. The stock gave a return of 38.89% in the past one month. Considering the attractive trading levels, returns in the past one month, decent operational performance and positive outlook, we have valued the stock using van EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Kelt Exploration Ltd, Crew Energy Inc, Tamarack Valley Energy Ltd, etc. as peers. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 0.82 on 19 May 2020.

NVA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Canacol Energy Ltd.

Canacol Energy Ltd (TSX: CNE) is engaged in the business of exploration and production of oil and natural gas in Colombia.

Q1FY20 Financial Statement Highlights: For the quarter ended March 31, 2020, CNE reported a robust top-line growth but failed to maintain the momentum in its bottom line. The group reported total revenue of USD 82.28 million, as compared to USD 50.92 million in pcp. The quarter was marked by a slight increase in operating expenses and general and administrative costs, significantly higher transportation expenses, depletion & depreciation expenses and a lower net finance expense. Higher operating cost resulted in a net loss of USD 25.98 million, as compared to a net profit of USD 6.274 million in 1QFY19. Adjusted funds from operations stood at USD 45.28 million, significantly higher from USD 29.91 million in pcp. The group exited the quarter with cash and cash equivalents and total assets USD 49.15 million and USD 745.80 million, respectively. The Company expects its full-year production guidance at around 197 MMscfpd, with the assumption of interruptible sales return by August 2020.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock has corrected ~15% so far this year and currently trading close to its 52 weeks low of CAD 2.70. At current price, the stock is offering an annualized dividend yield of 5.96%, seems attractive looking at the current interest rate scenario. Most of the energy stock witnessed severe correction due to the falling natural gas and crude oil prices owing to the lack of demand across the globe. The group witnessed virtually interruptible gas sales for the month of April owing to the nationwide lockdown from March 26, 2020 to April 27, 2020. However, the shutdown is expected to be lifted from May 26, 2020, and the Group expects, the demand to stabilize in July and August 2020. However, the group expect the demand to increase and stabilize as manufacturing and construction activities are operational in Colombia and the nationwide shutdown is scheduled to be lifted on 26 May 2020.  The group expects the demand for its natural gas in Colombia to increase in the near term due to an unusually dry winter, and in the medium to long term related to the continued decline of Colombia’s main gas producing fields. We also expect demand in the energy segment to spike up as the situation normalizes. On an EV/EBITDA basis, the stock is available at a lower valuation of 3.3x on NTM basis, as compared to 6.3x of industry (Energy) median. The recent correction coupled with demand improvement scenario offers a good entry point at the current trading levels. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current price of CAD 3.49 as on May 19, 2020.

CNE One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

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