Seven Generations Energy Ltd. 

Seven Generations Energy Ltd. (TSX: VII) is an independent energy company engaged on the acquisition, development, and optimization of high-quality, tight rock, natural gas resource plays. The company employs long-reach and horizontal drilling to produce resources of natural gas, condensate, and natural gas liquids.

Q2FY20 Financial Highlights: Seven Generations Energy Ltd. announced its second quarter results, wherein the revenue stood CAD 409.8 million as compared to CAD 687.3 million in Q2FY19, majorly attributable to a significantly lower income from the Condensate segment on account of falling realized price coupled with a decline in the sales volume. The company reported the price realization of condensate at CAD 26.59 /bbl, considerably lower from CAD 71.91/ bbl in the previous corresponding quarter. The company reported a loss before income tax at CAD 177.6 million, as compared to a profit of CAD 284.6 million in the previous corresponding period (pcp) due to lower revenue and a slight increase in the transportation, processing and other costs and product purchases, partially offset by lower operating expenses, depletion and depreciation expenses. The company reported a net loss of CAD 116.9 million, as compared to a net income of CAD 295.3 in the previous corresponding quarter. However, amidst the challenging time, the company posted free cash flow of CAD 69.4 million, as compared to CAD 44.2 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company’s business is exposed to natural gas prices, and the demand is directly correlated with the demand from the manufacturing and industrial sectors. The recent lockdown has dampened the realization price of the commodities. Any setback to lockdown easing or further breakout of the novel virus would hamper the demand for oil and natural gas, thereby impacting the group’s performance.

Valuation Methodology: Price/CF Based (Illustrative)

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

Stock Recommendation: The stock of VII corrected ~54% in the last one year, due to a drastic correction in the crude oil commodity price combined with a lower demand scenario. In order to ensure proper liquidity, the company is lowering its FY20 capital expenditure program, which is a prudent step considering the current scenario. The company has suspended its share buyback program and increased its liquids and foreign exchange hedges for the remainder of 2020. The company has available funding of CAD 1.1 billion, primarily consisting of undrawn credit capacity that matures at the end of 2024. Further, the Management reported that the earliest debt maturity date is May 2023, which is a key positive. We expect the demand for crude oil and natural gas to improve gradually as the governments across the states are easing the lockdown restrictions and allowing industrial and manufacturing activities to resume. A recovery in demand would help in stabilizing the prices, which augur well for the company's cash flow. The stock witnessed a pullback rally in recent past and appreciated ~46% in the last three months. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a low double digit upside potential (in % terms). For the said purpose, we have considered peers like Nuvista Energy Ltd, Crescent Point Energy Corp, and Whitecap Resources Inc etc. Hence, considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 3.93 on August 04, 2020.

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

Crescent Point Energy Corp

Crescent Point Energy Corp (TSX: CPG) is a Canada based company engaged in the oil & gas segment. The primary segment revolves around exploring, developing, and producing oil and gas with assets located in the United States and Western Canada. The Group has natural gas and crude oil properties located in Manitoba, British Columbia and Alberta in Canada and Utah, Colorado, Montana and North Dakota in the US.

Q2FY20 Financial Highlights: CPG declared its quarterly results, wherein the Company posted revenue of CAD 174.9 million as compared to CAD 894.1 million in the previous corresponding period (pcp). The decline is majorly attributable to 63% y-o-y decline in the realized prices which stood at CAD 26.74 /bbl.  NGLs volumes were down by 62% y-o-y at CAD 8.11/bbl, which was partially offset by higher Natural gas prices. The Company reported lower average production of 120,842 boe/day as compared to 172,476 boe/day in pcp. Net loss before tax stood at CAD 206.2 million as compared to a net income before tax of CAD 274.1 million. The quarter was marked by lower operating expense of CAD 130.8 million against CAD 197.9 million in pcp and a drastic fall in depletion, depreciation, amortization and impairment cost. The Company reported a net loss of CAD 145.1 million as compared to net income of CAD 198.6 million in Q2FY19. The Company reported a cash balance of CAD 27.6 million, while total assets stood at CAD 7,022.8 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risk: The group’s performance is directly linked to the demand and price of crude oil and natural gas. Any volatility in price and demand for oil and gas would hamper the group’s performance.

Valuation Methodology: Price/CF Based (Illustrative)

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

Stock Recommendation: The stock of CPG corrected ~57% and ~45% in the last nine months and one year, respectively due to the significant price erosion in the crude oil prices in the recent past. The income of the company is drastically impacted by lower crude oil prices coupled with lower sales volume due to the ongoing COVID 19 pandemic. We expect the demand to improve along with the commodity price due to the opening of the several economies and restart of several manufacturing and industrial activities. The company has currently hedged, on average, over 65% of its oil and liquids production, net of royalty interest, through the remainder of 2020. Amid a challenging time, the company declared a quarterly cash dividend of CAD 0.0025 per share. The company expects annual average production in the range of 110,000 to 114,000 boe/d with development capital expenditures toward the lower end of its guidance range of CAD 650 to CAD 700 million in 2020.  We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a high single-digit upside potential (in % terms). For the said purpose, we have considered peers like Whitecap Resources Inc, Seven Generations Energy Ltd, Enerplus Corp etc. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 2.22 on August 04, 2020.

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

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