Crescent Point Energy Corp

Crescent Point Energy Corp (TSX: CPG) is a Canada-based oil and gas exploration, development and production company with assets consisting of light and medium oil and natural gas reserves in Western Canada and the United States.

Key Highlights

• Increased annual production guidance:The Company recorded a robust operational execution in Q3 2020, resulting in the Company to increase its annual production guidance to the upper end of its prior guidance range at 121,000 boe/d, while the capex guidance remained unchanged at CAD 665 million.
• Reducing Debt Levels: The company managed to bring down its net debts by over CAD 575 million on year-to-date basis and approximately CAD 1.2 billion since the third quarter of 2019. As on September 30, 2020, Net debts stood at about CAD 2.2 billion. Current Cash and unutilized credit capacity stood at CAD 2.5 billion, providing ample liquidity for its operations.
• Revenue grew on a sequential basis:On a sequential basis, the company has shown an improvement in terms of revenue on the back of improvement in crude oil prices in Q3 2020. The average realized price rebounded from the second quarter lows with better WTI benchmark prices and narrower differentials, which helped to generate adjusted funds flow from operations of CAD 235.7 million.

Source: Company

Financial Overview of Q3 2020

Source: Company

• The Company's average third-quarter production was 113,383 boe/d, comprised of over 90% oil and liquids.
• Total oil and gas sales were CAD 437.0 million in Q3 2020, decreased 43% from CAD 769.1 million in the same period of 2019 due to lower production levels and the decrease in realized crude oil prices. For Q3 2020, the Company's average selling price for crude oil fell 27% from the same period in 2019, primarily due to the 27% decrease in the US$ WTI benchmark price.
• In Q3 2020 the Company reported net income of CAD 0.5 million, compared to a net loss of CAD 301.7 million in the same period of 2019, on the back of a decrease in DD&A and impairment expense, decrease in other loss and the foreign exchange gain on long-term debt. 

Risk associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, adverse weather conditions etc. The company also enters physical and financial derivative contracts to manage exposure to fluctuations in commodity prices and foreign exchange rates, which could affect the performance adversely.

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

The group generated approximately CAD 120 million of excess cash flow during the third quarter, demonstrating continued capital discipline. Further, the company enhanced sustainability and cost structure, allowing for the 2021 preliminary program to be fully funded at approximately US$40 /bbl. The increase to the group's 2020 production guidance, with unchanged capital expenditures, demonstrates the success of the company's continued operational execution and capital discipline. The group's financial results for the remainder of the year are also well insulated from the current volatility in commodity prices, as approximately 70% of its fourth-quarter oil production is hedged at attractive levels. Therefore, based on the above rationale and valuation, we have given a 'Speculative Buy' rating at the closing price of CAD 1.68 on November 4, 2020. We have considered Tourmaline Oil Corp, Whitecap Resources Inc and ARC Resources Ltd as a peer group. 

CPG daily technical chart. Source: Refinitiv (Thomson Reuters)

Baytex Energy Corp

Baytex Energy Corp (TSX: BTE) is a Canada-based oil and gas exploration company which operates through the exploration, development, and production of crude oil and natural gas across Canadian and United States. The group derives the majority of revenue from the Canadian market and rest from the United States.

Key Highlights:

• Stable FY20 Guidance: The company has reaffirmed its production guidance to ~80,000 boe/day, from its earlier guidance of ~78,000 boe/day to ~82,000 boe/day. As per the new guidance, the company lowered its FY20 operating expense (at CAD 11.20 – CAD 11.40/boe versus CAD 11.75 – CAD 12.50/boe), Interest expense (from CAD 112 million to CAD 108 million) and its royalty rate (from ~18.5% to ~18%), which would support the group’s margin.

FY20 Revised Guidance (Source: Company Reports)

• Impressive Operating Activities to generate higher free cash flow: The company has retained a stable production level from FY16 to 9MFY20, which is a key positive. The company generated a cumulative CAD 787 million of free cash flow since FY16 till date. Furthermore, improved drilling activities are likely to support the company’s free cash flow levels in the foreseeable future.

Operational Activities and Free Cash Flow Levels (Source: Company Reports)

Q3FY20 Financial Highlights:

• BTE posted its Q3FY20 revenue at CAD 212.486 million, as compared to CAD 349.583 million in the previous corresponding period (pcp). The decline was primarily attributable to a lower income from petroleum and natural gas sales both from Canada and the U.S. region.
• Total expense stood at CAD 234.912 million, lower than CAD 332.849 million in pcp. The company reported a loss before income tax at CAD 22.426 million, as compared to an income of CAD 16.734 million in Q3FY19.
• At the end of the quarter, the corporation reported a net loss of CAD 23.444 million, as compared to a net income of CAD 15.151 million, a year ago.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The revenue of the group is dependent on the international crude oil prices. Hence, any downside in the oil prices would take a toll on the overall financial performances. Extension of the shutdowns due to COVID-19 outbreak could dampen the demand further and impact the international commodity prices.

Stock Recommendation:

Due to a decline in the international crude oil prices on account of oversupply scenario, the stock of BTE corrected ~76% so far this year. However, the company has reaffirmed its FY20 guidance, which is encouraging. We expect the oil demand to improve gradually following the resumption of industrial activities, which would support the commodity prices as well. On the valuation front, BTE stock trades at a significantly lower price to cash flow of 0.8x on Next Twelve Months (NTM) basis, as compared to the industry (Oil & Gas) median of 2.4x. Hence, considering the aforementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.445 on November 04, 2020.

BTE 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.