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:

• Solid Financial Metrics: Amidst the current slowdown in the oil and gas industry on account of lower commodity prices, ERF reported a cash flow generation along with a considerably 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. Notably, the company delivered a strong free cash flow of ~CAD 300 million since FY17, which indicates strong operational resilience and prudent expense management.

Financial Metrics from FY17-FY19 (Source: Company Presentations)

• Risk-management through prudent hedging strategies: In order to combat the persisting lower oil price, the company hedged an average of 21,000 barrels per day of crude oil through financial derivative contracts for the remainder of FY20 and 10,000 barrels per day for the first half of FY21. Within the natural gas segment, ERF hedged 40,000 Mcf per day at a fixed price of USD 2.96 per Mcf for the summer of FY21.

Source: Company Reports 

Q3FY20 Financial Highlights:

• ERF declared its quarterly results, wherein the company posted a lower revenue stood at CAD 192.838 million, as compared to CAD 339.036 million in the previous corresponding period (pcp). The decline was primarily due to a significantly lower selling price of crude oil at CAD 46.43 /bbl, as compared to CAD 67.76/bbl, in Q3FY19.

Source: Company Reports

• Loss before taxes widened to CAD 252.866 million, from an income of CAD 83.777 million, a year ago. The decline was due to lower revenue coupled with an increase in total expenses (CAD 445.704 million as compared to 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.
• The company reported a cash and cash equivalent of CAD 84.547 million, while total assets of CAD 1,713.564 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The group’s performance is correlated to the price of oil & gas. Volatility in commodity price and change in demand dynamics would affect the group’s performance.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

Due to the recent up move in the international crude oil prices, the stock of ERF gained handsomely in the recent past. The stock soared ~60% and ~73% in the last one month and three months, respectively. We believe the recent rise in the commodity price indicates a revival in the demand dynamics within the oil and gas sector as the industrial and the manufacturing sectors are on the verge of recovery. Furthermore, the company reported inclusion of asset impairment charges amounting CAD 256.809 million and subsequently resulted in a net loss. We expect these charges to be one-off nature. The stock closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. 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 (Energy) median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 4.38 on December 15, 2020.

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

Spark Power Group Inc

Spark Power Group Inc. (TSX: SPG), formerly known as Canaccord Genuity Acquisition Corp, is a Canada-based provider of electrical power services to industrial, commercial, institutional, renewable, agricultural and utility customers across North America. 

Key highlights 

• Revenue returning to pre-pandemic levels: Economies across North America and around the world continue to be impacted by the COVID-19 pandemic, but thanks to the company’s diversification across geographies and customer segments, the company’s quarterly revenue is now back to pre-pandemic levels. The management expects to see a return to historical rates of organic growth over the next several quarters.

Source: Company 

• Robust performance of Renewables segment: The Company’s renewables division is generating record revenues and growing faster than the industry. The Company completed the acquisition of One Wind that is included in the Renewables Segment and contributed CAD 10.8 million to the revenue increase in the third quarter of 2020. 

Financial overview of Q3 2020 (in thousands of Canadian dollars)

Source: Company               

• In Q3 2020, the company’s revenues increased by 9% to CAD 61.4 million, as against CAD 52 million in the previous corresponding period. Acquisitions made by the company were the sole reason for this increase in revenue. The company made acquisitions in the field of Technical Services segment and Renewables segment.

Source: Company 

• Gross profit increased by 3.3% to CAD 17.9 million in Q3 2020, as compared to CAD 17.3 million in the previous corresponding period. Gross profit margins were 29.2%, down from 33.3% in the Q3 2019. The decline in gross profit was mainly due to high COGS.
• In Q3 2020, the company reported Net Income of CAD 2 million, as compared to CAD 2.6 million in Q3 2019. The reasons for a drop in Net Income were higher interest expense and higher SG&A expenses in the reported quarter. 

Risks associated with an investment

If the second wave of Covid-19 arises, the business might witness a halt in its operational activities, which may dampen the performance. Other risks associated with the organization includes interest rate risk, liquidity risk and foreign currency risk. 

Stock recommendation 

The company remained fully operational, by leveraging its diverse customer base, including revenue stability from its regulated utility and renewable asset customers. With the easing restrictions in many jurisdictions, the company has reported strong performance in Q3 2020. From now on, we expect that the company would focus on maintaining its services to customers, which would enhance the overall performance. On the valuation front, the stock is available at EV/EBITDA of 5.0x on the NTM basis, which is significantly lower than the Industry (Construction & Engineering) average of 8.5x on NTM basis. Hence considering the aforementioned facts, we have given a “Speculative Buy” recommendation on the stock at the closing price of CAD 1.50 as on 15 December 2020.

1-Year Price Chart (as on December 15, 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.