MEG Energy Corp

MEG Energy Corp (TSX: MEG) is a Canada-based oil sands company focused on recovering bitumen from the oil sands by means other than surface mining in the southern Athabasca region of Alberta.

Key highlights

• Positive Production Guidance:The company revised its full-year 2020 average production guidance upward from 81,000-82,000 bbls/d to 82,250-82,500 bbls/d and expects to exit the year with approximately CAD 100 million in cash-on-hand. For FY2021, the production will be in the range of 86,000-90,000 bbls/d along with a capital budget of CAD 260 million. The management expects to fully fund this programme from internally generated cash flow, and this sounds good.

Source: Company

• Lowering Costs:The company expects an aggregate decrease in costs by CAD50 million, approximately CAD22 million from temporary cost reductions and remaining CAD28 million from the optimization of operations and rationalization of ongoing administrative costs. Non-Energy operating costs are now expected to be in a range of CAD 130-CAD 135 million, along with this, the G&A expense would be brought down in the range of CAD 45-CAD 47.5 million. We believe all these cutting measures would further help the group in posting healthy margins.

• Hedged the production:For 4Q 2020 the company has hedged approximately 80% of forecasted bitumen production at an average price of USD 45.76 per barrel under WTI fixed price hedges, and for FY 2021, the company has hedged 40% of forecasted bitumen production at an average price of USD 46.15 per barrel. 

Financial overview of Q3 2020 (in millions of Canadian dollars, except per share amounts)

Source: Company

• The Company posted total revenue of CAD 533 million in Q3 2020, decreased by 44% as against CAD 958 million in the previous corresponding period. The fall in revenue was due to lower blend sales price, driven by the decline in global crude oil, along the 75-day turnaround process, which got completed in mid-August.

• In Q3 2020, the Company generated adjusted funds flow of CAD 27 million, compared to CAD 192 million in Q3 2019. This 86% decrease was primarily due to lower cash operating netback of CAD16.58 per barrel in this quarter compared to CAD32.44 per barrel in Q3 2019.

• The Company reported a net loss of CAD 9 million in Q3 2020, compared to a net profit of CAD24 million in Q3 2019, primarily due to low revenue and a decrease in cash operating netback.  

Risk associated with investment

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

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

The first half of 2020 had extremely adverse movements in commodity prices coupled with uncertainty regarding near-term crude oil supply and demand. The third quarter of 2020 saw an improvement in the global oil market. During Q3 2020, the Company continued to take definitive action to enhance its financial position, including protecting liquidity with a robust commodity price risk management program, operational flexibility in capital program execution and improving cost efficiencies. The Company also revised its full-year 2020 average production upward from 81,000 - 82,000 bbls/d to 82,250 - 82,500 bbls/d and expects to exit the year with approximately CAD 100 million of cash-on-hand. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 4.61 on 19 January 2021. We have considered Cenovus Energy Inc, Tourmaline Oil Corp, Ovintiv Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on January 19^th, 2021). Source: Refinitiv (Thomson Reuters)

Canacol Energy Ltd.

Canacol Energy Ltd. (TSX: CNE) is a leading natural gas and oil exploration and production company in Colombia and Mexico.

Key Highlights:

• Improved natural gas and liquefied natural gas volume: During the third quarter of FY20, the company’s realized contractual natural gas and liquefied natural gas sales volumes increased 11% to 163 MMscfpd for the Q3FY20, compared to 146.4 MMscfpd in the same period of previous financial year. Average natural gas and LNG production volumes increased 10% to 162 MMscfpd for the three months ended September 30, 2020, compared to 147.6 MMscfpd for the same period in 2019.

• Operational Updates: Recently, the group reported operational updates wherein it produced realized contractual natural gas sales of 161 million standard cubic feet per day (MMscfpd) during the month of November and 175 MMscfpd for December 2020. The group seek to mobilize the rigs to the Flauta 1 exploration and Oboe 2 development drilling locations, with the spud of each anticipated in the third week of January 2021. Notably, testing and drilling of each well would take approximately five weeks.

• Favorable Demand Outlook: The demand for gas is likely to accelerate, as it continues to provide backup power generation, replacing coal and petroleum used for electrical power generation. Colombia plans to use more gas to meet its Paris Agreement CO2 Emission and targets for a 20% lower emission by 2050. Notably, gas produces 50% less CO2 as compared to Coal and 30% less than Crude Oil. Over the years, the company reported ~40% CAGR growth (between FY13 to FY20E) within the Gas Sales. We believe, as the developed nations are focusing on the preservation of the environment through reducing air pollution, the usage of gas for power generation is likely to remain elevated in the coming days.                    

Source: Company Presentations

Q3FY20 Financial Highlights:

• CNE announced its quarterly results, wherein the group reported revenue of USD 64.474 million, slightly higher than USD 63.646 million in the previous corresponding period (pcp). The slight increase was on account of 10% y-o-y increase in Natural gas and LNG production at 162,012 MMscfpd.
• Total expense stood at USD 38.841 million, higher than USD 34.553 million in Q3FY19, due to higher general and administrative and depletion and depreciation costs.
• Net income stood at USD 2.609 million, significantly higher than USD 0.663 million in pcp, supported by lower income tax expense.
• The group reported cash and cash equivalents of USD 93.770 million, while total assets were recorded at USD 90.265 million.         

Income Statement Highlights (Source: Company Reports)

Risks: Fall in the international natural gas prices would take a toll on the company’s income and overall performance.

Valuation Methodology (Illustrative): Price to CF-based

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

Stock Recommendation:

The company has a track record of dividend distribution to its shareholders, backed by stable cash flows and income generations. We believe, due to the positive macros, the company is likely to report improved cash from operations and would continue to pay dividends to its shareholders. Moreover, the stock of CNE carries an attractive dividend yield of ~5.591%, significantly higher than the yield of TSX Composite of ~3.32%, which is expected to appeal the income investors. The company has a strong balance sheet and is expected to seek operational efficiency through low costs and high margins combined with growing economies of scale, backed by long-term fixed-price take-or-pay sales contract. During the last decade, CNE has evolved as a Vital Supplier of Gas to Caribbean Coast Market and has grown production to supply ~50% of demand in the Caribbean market. We expect the momentum to continue in the coming days, which would support the company’s overall operations. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Energy) median on NTM basis etc. Considering the aforesaid facts, price movements, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 3.67 on January 19, 2021.

1-Year Price Chart (as on January 19^th, 2021). 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.