Canacol Energy Ltd.

Canacol Energy Ltd. (TSX: CNE) is a natural gas exploration and production company with operations focused in Colombia. 

Key Highlights:

• Impressive Dividend Yield: The company has reported consistent dividend payment in the past, backed up by stable cash flow generation. Moreover, at the last traded price, the stock was offering a dividend yield of ~6.40%, which is lucrative considering the current interest rate scenario. 

• Ample Liquidity: The company has ample liquidity to fund its upcoming projects and working capital needs. CNE has USD 320 million funds, which is expected to be matured in 2025. Moreover, the company has a bridge loan and revolving credit facility of USD 75 million and USD 46 million, respectively. Notably, the company maintains prudent capital management and do not have any high-value maturity till 2025, which is a key positive.                 

Source: Company Presentation

• Operational Update: As per the recent update provided by the company, CNE realized contractual natural gas of 166 million standard cubic feet per day for the month of April 2021. On the other hand, the company’s Nelson 9 development well reported 52 feet true vertical depth of gas pay across the Porquero sandstone target and expects production in May 2021. Additionally, CNE expects its production from Aguas Vivas 1 exploration from the Mid May 2021.

Q1FY21 Financial Highlights:

• CNE announced its quarterly result, wherein the company reported total revenue of USD 75.091 million, declined from USD 82.287 million in the previous corresponding period (pcp). Realized contractual natural gas and liquefied natural gas sales volumes decreased 12% on y-o-y to 177.6 MMscfpd.
• Total expenses stood higher at USD 52.590 million v/s USD 50.051 million in pcp. The quarter was marked by lower transportation expenses (USD 9.273 million v/s USD 11.293 million in pcp), a lower depletion and depreciation (USD 16.903 million v/s USD 17.954 million in pcp), partially offset a slightly higher operating expense (USD 4.704 million v/s USD 4.466 million in pcp).
• Income before income taxes was recorded at USD 14.075 million, declined from USD 24.892 million in Q1FY20.
• The group reported a net loss of USD 3.062 million, as compared to a net loss of USD 25.988 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the international oil and gas prices are likely to affect the company’s realization price, which might lead to lower margin and slide in cash flows.

Valuation Methodology (Illustrative): Price to CF based 

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

Stock Recommendation:

For FY21, the company is planning to drill twelve wells, which includes nine exploration and three development projects. Additionally, the company would acquire 665 sq.km of 3D seismic during the period. The capital expenditure for FY21 is expected at ~USD 140 million, wherein ~USD 85 million is expected to deploy for exploration Wells & Seismic, and ~21 million is expected to be utilized for Maintenance & Development Drilling activities. Over the years, the company has reported an increase in its natural gas sales and has lowered its crude oil sales.

Source: Company Presentation

We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have industry (Energy) median on an NTM basis etc. Based on technical analysis, the stock has support at CAD 2.65 level. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CNE at the last closing price of CAD 3.25 on May 19, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

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

Ensign Energy Services Inc.

Ensign Energy Services Inc. (TSX: ESI) is a Canada-based oil services company that offers services like drilling and well servicing, oil sands coring, directional drilling, underbalanced and managed pressure drilling, equipment rentals, transportation, wireline services, and production testing services. 

Key Highlights:

• Changing Macro Dynamics: The macro scenario improved drastically from the fallout in FY20 due to the COVID-19 pandemic due to demand-supply mismatches across the globe. The steep declines in demand and continued oversupply resulted in an activity slowdown for oilfield activities. Later, during the second half of FY20, the oil market rebounded, supported by a rise in demand due to reopping of industrial and manufacturing activities, which further supported the commodity price. We expect the scenario to improve, which would increase the demand of the group’s offerings.

Source: Company Presentation

• High-quality, diversified asset-base: The Ensign fleet is well suited to service key petroleum basins around the world. The company’s fleet base is located across the globe, while the majority of it in North America, the company has a decent presence across Australia, the Middle East, Argentina & Venezuela. Almost 75% of the company’s fleet are high spec with Long-Life with an average age of more than ten years and with a full life cycle of twenty-five years. Due to the above factors, we believe the company is likely to deliver improved performance in the coming days.

Source: Company Presentation

Q1FY21 Financial Highlights:

• In Q1FY21, ESI posted a 43% y-o-y decline in its top line at CAD 218.544 million. The revenue was impacted by the significant correction in international crude oil prices due to oversupply dynamics. Within the Canada region, drilling days stood at 1,846, as compared to 3,102 drilling days a year ago. On the other hand, ESI reported 2,581 drilling days in Q1FY21 from the US region, as compared to 5,141 drilling days in Q1FY20.
• Adjusted EBITDA was recorded at CAD 49.898 million, reflecting a 45% decrease over Q1FY20. The decline was primarily due to a lower income, partially supported by a slide in total expense (CAD 250.472 million v/s CAD 389.874 million in pcp). During the quarter, the company reported a lower expense related to Oilfield services (CAD 159.443 million v/s CAD 282.822 million) coupled with a decline in the general and administrative costs (CAD 9.203 million v/s CAD 11.804 million in pcp).
• Net loss stood widened to CAD 43.550 million, from a loss of CAD 29.250 million in the previous corresponding period (pcp).
• At the end of Q1FY21, the group reported a cash balance of CAD 33.416 million, while total assets were recorded at CAD 2,966.277 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s operations are dependent on the capital expenditure of the players in oil & gas industry. Volatility in commodity price or change in demand dynamics may affect these expenditures. This, in turn, would affect the group’s operations.

Stock Recommendation:

The company has adopted a disciplined capital management and cost reduction strategies in the recent past. From FY18 onwards, net debt is on a downtrend, while interest expense reduced by 23% on y-o-y basis in FY20. The company has lowered its total debt by CAD 197 million during FY20, despite the macro headwind, which is a key positive.

Source: Company Presentation

On the valuation front, the stock is trading at a forward EV to Sales multiples of 1.4x, which is significant lower compared to the industry median of 5.9x. Based on technical analysis, the stock has support at CAD 1.06 level. Hence, considering above-mentioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 1.31 on May 19, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

One-Year Price Chart (as on May 19, 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.