Enerplus Corporation

Enerplus Corporation (TSX: ERF) produces and develops crude oil and natural gas assets across Canada and the United States regions. The company’s majority of oil production is derived from the Williston and Waterfloods basins, while Marcellus provides a considerable portion of natural gas production.

Key Highlights:

• Revised guidance: The group has increased its 2020 annual production guidance to 90,000 to 91,000 BOE per day (from 88,000 to 90,000 BOE per day), including 50,500 to 51,000 barrels per day of liquids (from 49,000 to 50,000 barrels per day). The increase is primarily due to the Company's 2020 North Dakota well program outperforming expectations. The group reduced its 2020 capital budget to CAD 295 million, from CAD 300 million, driven by strong operational execution in 2020.
• Strong liquidity and lower maturity profile: The company reports strong liquidity of USD 665 million at the end of Q3FY20, which seems sufficient to withstand the current challenging environment. Furthermore, the company’s debt maturity staggered over next six years, which is likely to help in retaining the liquidity levels in the foreseeable future.

Liquidity and Maturity trends (Source: Company Presentation)

• Impressive Financial Metrics: The business of ERF is characterized by strong cash flow generation combined with a relatively lower net debt to adjusted funds flow ratio. At the end of Q3FY20, the company reported a leverage ratio of 1.0x, which is impressive considering the nature of the business. Furthermore, the company delivered a strong free cash flow of ~CAD 300 million since FY17. The company has repurchased ~10% of its outstanding equity shares since Q3FY18, depicting higher management confidence in the business.

Financial Metrics since FY17 (Source: Company Presentations)

• Consistent dividend payment: The group continue to distribute dividend despite a challenging operating environment. The company announced a cash dividend of CAD 0.01 per share, payable on November 16, 2020. At the last trading price, the stock was offering a dividend yield of ~4%, which is decent amid a low interest rate environment.

Q3FY20 Financial Highlights:

• ERF announced its third quarter results, wherein the company posted a significantly weak performance due to a significant fall in the crude oil prices combined with inclusion of asset impairment amounting to CAD809 million. Revenue stood at CAD 192.838 million, as compared to CAD 339.036 million in Q3FY19. The company reported its average selling price of crude oil at CAD 46.43/bbl, as compared to CAD 67.26/bbl, a year ago.
• Loss before taxes stood at CAD 252.866 million, against an income of CAD 83.777 million in Q3FY19, due to lower revenue and an increase in total expenses (CAD 445.704 million versus CAD 255.259 million in Q3FY19).
• The company reported a net loss of CAD 112.753 million, as compared to a net income of CAD 65.181 million in pcp.        

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The performance of the company is dependent on crude oil prices, and price volatility would hamper the company’s operations.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation: To withstand the current decline in commodity prices, the company has opted for hedging contracts to protect its cash flow from operating activities and adjusted funds flow. Recently, ERF hedged 21,000 bbls/day of crude oil for the remainder of FY20 and 10,000 bbls/day for the first half of FY21, which is expected to protect against the falling crude oil prices. We have valued the stock using P/CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Oil and gas) median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 2.94 on November 11, 2020.

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

NuVista Energy Ltd

NuVista Energy Ltd. (TSX: NVA) engages in the exploration, development, and production of oil and natural gas in the Western Canadian Sedimentary Basin.

Key Highlights

• Reduction in operating costs: The company reported a lower operational cost over the years, driven by improvement in drilling performance and continuous focus on placing proppant more efficiently while increasing completions intensity. The Reduction is input costs augurs well for margin improvement.

Source: Company Presentations

• Elevated production levels: Despite economic cycles, the corporation has maintained its production levels, which indicates operational resiliency. For FY20 and FY21, the company expects its production to remain at or above 50,000 Boe/day, which is impressive.

Source: Company Presentations

• Strong Cash flow generation: Despite the ongoing slowdown coupled with demand destruction scenario, the company has retained its cash flow levels. During the second half of FY20, the company is likely to generate cash flow of ~CAD 80 million, while FY21 cash flow is expected at around CAD 200 million to CAD 265 million. The company is likely to allocate ~70% of its cash flow for FY21 capital investments.

Source: Company Presentations

Q3FY20 Financial Highlights:

• NVA announced its quarterly results, wherein the company posted revenue of CAD 102.581 million, as compared to CAD 131.283 million in the previous corresponding period (pcp).
• Production during the quarter stood at 49,443 Boe/day, lower than 51,819 Boe/day.
• Loss before taxes widened to CAD 44.144 million, from CAD 9.819 million in Q3FY19, due to a lower income, partially supported by a lower total expense of CAD 117.746 million, against CAD 134.863 million in pcp.
• Net loss and comprehensive loss stood at CAD 44.144 million as compared to CAD 7.650 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in crude oil prices would dampen the company’s realization price and subsequently, hinder the top-line and profitability.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation:

For the fourth quarter, the group’s net debt is expected to further decrease by approximately CAD 25 – CAD 30 million, resulting in yearend estimated credit facility drawings of CAD 370 to CAD 380 million. We expect the crude oil price to improve gradually, aided by re-opening of economy and surge in industrial demands. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Seven Generations Energy Ltd, Crescent Point Energy Corp etc. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.88 on November 11, 2020.

NVA Daily Technical Chart (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.