Teck Resources Limited 

Teck Resources Limited (TSX: TECK.B) is a diversified mining company which operates in coal, copper, zinc, and oil sands operations in Canada, the United States, Chile, and Peru. 

Recent update

On October 28, 2020, the company informed that the Toronto Stock Exchange had accepted the company’s notice of intention to make a normal course issuer bid to purchase its Class B subordinate voting shares. The company has the option to purchase up to 40 million Class B Shares till November 1, 2021, which represents ~7.6% of the outstanding Class B Shares, or 8.7% of the public float, as of October 28, 2020.

Key Highlights

• With the introduction of the cost-reduction program in Q4FY19, the company realized ~CAD 270 million in operating cost savings and ~CAD 550 million in capital cost savings.
• Despite a sluggish economic scenario, the company maintained its H2FY20 production guidance, except a minor reduction in copper segments, due to lower estimated production from Highland Valley Copper unit.

Production Guidance (Source: Company Presentation)

Q3FY20 Financial Highlights:

• The group posted a decline in revenue at CAD 2,291 million, as compared to CAD 3,035 million in the previous corresponding period (pcp). The decrease was primarily attributable to a significantly lower income from Steelmaking coal and Energy segments on account of ~35% and ~27% year-on-year decline in steel coal and blended bitumen prices.

Snapshot of commodity prices (Source: Company Reports)

• Due to lower realization prices and a subsequently sluggish income, the company’s EBITDA slide to CAD 519 million, as compared to CAD 1,036 million in the previous corresponding period.
• Net profit declined to CAD 25 million, significantly lower than CAD 373 million in Q3FY19.
• The company ended the quarter with cash and cash equivalent of CAD 403 million, while total assets stood at CAD 40,267 million.

Q3FY20 Income Statement Hghlights (Source: Company Reports)

Risks: The income of the company is directly correlated to the international commodity prices and volatility in the prices and demand would affect the company’s revenue.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The first half of FY20 saw significant setbacks in the operations, on account of COVID 19 restrictions. However, the company reported strong recovery during Q3FY20 from Q2FY20, with significant improvement in its operations, which is commendable. Furthermore, the company’s construction and upgradation activities were on track with Neptune facility upgrade progressing in line with budget and schedule followed by ramping up of QB2 construction moving towards normalcy. We have valued the stock using Price to CF value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Basic Materials) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 17.51 on October 30, 2020.

TECK.B Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Ovintiv Inc.

Ovintiv Inc. (TSX: OVV) is a leading North American exploration and production (E&P) company focused on developing its high-quality, multi-basin portfolio. The Company's operations also include the marketing of natural gas, oil and NGLs. It operates through three segments: Canadian Operations, USA Operations and Market optimization.

Key Highlights

• Despite the global headwinds, during the quarter, the company delivered USD 47 million of free cash flow and reduced net debt by USD 217 million. The company is planning to reduce total debt by at least USD1 billion from the second half of 2020 through year-end 2021.

• The company exceeded in Q3 2020 for crude and condensate production of 186 thousand barrels per day (Mbbls/d) from their previous guidance. For the upcoming quarter and full-year 2021, crude and condensate average production is forecasted to be of 200 Mbbls/d.

• The Company is largely hedged through year-end 2020 on benchmark WTI and Henry Hub price risk. For Q4 2020, hedges include 180 Mbbls/d of oil at an average price of USD 51.76 per barrel and about 1.2 billion cubic feet per day (Bcf/d) of natural gas at an average price of USD 2.66 per Mcf.

• Current liquidity stood at approximately USD 3.1 billion. About 80% of the company's total fixed-rate long-term debt is due in 2024 or later.

• Despite a challenging business environment, the company maintained its dividend payment at a time when most of the businesses are cutting down or suspending their dividend distribution. This shows the group's financial strength. At the last closing price, the stock was offering a dividend yield of 4.07%, which is significantly higher, given the lower interest rate environment. 

Q3FY20: Financial Highlights

Source: Company Filing

• Net revenues posted by the Company dropped in Q3 2020 to USD 1.1 billion against USD 1.8 billion on Y-o-Y basis.

• The Company recorded a net loss in Q3 2020 of USD 1.5 billion, or (USD 5.85) per share of common stock. The following items impacted results:
• A non-cash ceiling test impairment of USD 1,336 million, before-tax, primarily related to the decline in 12-month average trailing commodity prices which reduced SEC proved reserves.
• A non-cash unrealized loss on risk management of USD 243 million, before-tax, related to the mark-to-market value of derivative positions.
• The company declared a dividend of USD0.09375 per share payable on December 31, 2020 with a record date of December 15, 2020.

Risk associated with Investment

As the company is in exploration business of oil and gas, therefore its revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors which could impact their financial performance are like low demand for oil and gas, and financial risk on behalf of their hedged positions.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

Despite the global headwinds, the company delivered USD 47 million of free cash flow and reduced net debt by USD 217 million. The company is focusing on cost-cutting measures and targeting to achieve more than USD 200 million in cost-saving. An additional USD 100 million of legacy cost reductions is likely to further enhance cash flows. Also, the ample liquidity of USD3.1 billion seems enough to meet the near-term requirement. We believe that the reopening of industries and manufacturing units would boost the demand for oil and gas, which is likely to be beneficial for the company. Therefore, based on the above rationale and valuation, we have given a “Buy” rating on the stock at the closing price of CAD 12.27 on October 30, 2020. We have considered Southwestern Energy Co, Devon Energy Corp, Crescent Point Energy Corp etc. as the peer group for the comparison.

1-year Daily Price Chart (as on October 30^th, 2020, after the market close). 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.