Tourmaline Oil Corp.

Tourmaline Oil Corp. (TSX: TOU) is a Canadian energy company engaged exploration, development, and production of natural gas and crude oil in the Western Canada Sedimentary Basin.

Outlook: The Company expects FY20 Full-year average production within the range of 305,000 boepd

to 310,000 boepd while capital expenditure is expected at around CAD 800 million. The group expects if FY20 cash flow to be around CAD 1.0 billion.

Q1FY20 Financial Highlights: TOU declared an improved revenue of CAD 669.64 million, as compared to CAD 579.13 million in the previous corresponding period. For Q1FY20, the company reported average production 308,349 boepd, reflecting a growth of 5% over Q1FY19. The Company reported a loss from operations of CAD 40.73 million against a profit of CAD 136.73 million in Q1FY19. The significant decline was primarily attributed to a considerable rise in depletion, depreciation, amortization and impairment expense, followed by a surge in transportation, marketing purchases and general and administration expenses. This was partially offset by lower operating expense, FX gain and gain from acquisitions and divestitures. Net loss stood at CAD 36.13 million, as compared to a net profit of CAD 87.68 million due to an operating loss and a higher finance expense, partially offset by a deferred tax recovery. The company exited the quarter with total assets of CAD 11,106.25 million. During Q1FY20, TOU confirmed its acquisition of Polar Star Canadian Oil and Gas Inc. for total cash consideration of CAD 12 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV to EBITDA Based Relative Valuation (Illustrative)

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

Stock Recommendation: Despite a steep correction in the market, the stock of TOU corrected ~8% YTD and outperformed the benchmark index by ~5%. The stock was trading above its 200-day simple moving average (SMA) of CAD 12.59, which indicates a long-term bullish -trend. To weather the current crises, the group has lowered its capital budget to CAD 800 million. The group mentioned that it has sufficient liquidity and can manage the FY20 capital budget via cash flow. Further, the group has an unutilized credit facility of CAD 1.3 billion, which seems sufficient to support the company’s near-term requirement. The company expects its FY20 operating cost to average around CAD 3.3/boe against the original guidance of CAD 3.45/boe on account of operational efficiencies achieved in Q1 along with some relief provided by the government. We expect the demand for crude oil to recover gradually as governments across the globe are easing the lockdown restrictions and industrial activities are started to resume. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like ARC Resources Ltd (TSX: ARX), Crescent Point Energy Corp (TSX: CPG) and Parex Resources Inc. (TSX: PXT) etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 13.95 on May 22, 2020. 

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

Husky Energy Inc.

Husky Energy Inc. (TSX: HSE) is an integrated energy company based in Canada and operates in upstream and downstream activities.

The Board of Directors declared a quarterly dividend of CAD 0.0125 per common share payable on July 2, 2020. 

Q1FY20 Financial Highlights: HSE reported its 1QFY20 result wherein, revenue declined to CAD 4,068 million as compared to CAD 4,539 million in the previous corresponding period. The quarter was marked by higher production of 298.9 mboe/day, reflecting a growth of 5% over the previous corresponding quarter while the HSE witnessed a margin hit due to lower crude oil prices. The Group reported a loss from operating activities at CAD 2,150 million, as compared to a profit of CAD 0.428 million, due to higher purchases of crude oil and products and a considerable surge in depletion, selling, general and administrative expenses and depreciation, amortization and impairment expenses. Net loss during the quarter stood at CAD 1,705 million, as compared to a profit of CAD 328 million in pcp. The Company exited the quarter with cash and cash equivalents of CAD 1,322 million, and total assets of CAD 31,085 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to CF Based Relative Valuation (Illustrative

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

Stock Recommendation: The stock of HSE corrected ~60% so far this year and currently quoting near the lower band of its 52-weeks trading range of CAD 13.11 and CAD 2.22. The stock price is correlated with the movement of international crude oil prices. The stock witnessed a pull-back rally and appreciated ~12% during the last five trading sessions, outperforming the index by ~10%. The Company’s structure, which includes the deep physical integration of upstream, midstream and downstream assets in the Integrated Corridor business, and long-term contracts in Asia provides insulation from the impacts of oil price and differential volatility. The group reduced its planned spending by half and shut-in production and reduce refinery throughput to avoid cash-negative margins. The group reduced its dividend payment, which Is likely to help in better allocation of capital. The Company has an unused credit facility CAD 3,405 million, which seems sufficient to cope up with the current pandemic. We expect an improved demand for oil from higher industrial and manufacturing activities, driven by the relaxation provided for business operations across the geographies. We have valued the stock using van P/CF-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like MEG Energy Corp (TSX: MEG), Cenovus Energy Inc (TSX: CVE), Vermilion Energy Inc. (TSX: VET) etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 4.12 on May 22, 2020. 

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

Disclaimer

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