MEG Energy Corp.

MEG Energy Corp. is a Canada-based company, engaged in situ oil sands development and production from Christina Lake Project.

Q2FY20 Financial Highlights: MEG announced its quarterly results, wherein the company posted total revenue of CAD 307 million, as compared to CAD 1,061 million in the previous corresponding period (pcp). The drastic fall in the revenue was due to the negative impact of lower crude oil prices. Thus, AWB blend sales price stood lower at USD 15.12 per barrel, as compared to USD 27.12 per barrel in Q1FY20. Transportation and storage costs were recorded at an average of USD 5.92 per barrel of AWB blend sales as compared to USD 4.39 per barrel in Q1FY20. The increase in transportation and storage costs was majorly due to the fixed costs related to contracted capacity. Loss before income taxes widened to CAD 142 million, from a loss of CAD 52 million in pcp. The quarter was marked by lower operating costs like a decline in the diluent and transportation, lower purchase product costs, and a significant slide in depreciation and depletion expense. However, a gain in foreign exchange supported the bottom line. Net loss came in higher at CAD 80 million, as compared to a net loss of CAD 64 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The performance of the company is correlated with the international crude oil prices, and volatility in the prices would lower down the average selling price and would hurt the revenue.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock pf MEG corrected ~59% so far this year, due to the drastic correction in crude oil price. However, following the recent upsurge in the crude oil prices coupled with positive investors' sentiment, the stock reported a stupendous gain of ~90% in the last six months. The company took a prudent step and lowered its capital investments to CAD 20 million, as compared to CAD 54 million in Q1FY20, to support the liquidity. Current cost-efficiency strategies like relying on internal resources to reduce extra expenses are encouraging, and we believe the company is likely to surpass the current downturn smoothly. Full-year production guidance is now targeted to 78,000 bbls/day to 80,000 bbls/day compared to its previous guidance of 94,000 bbls/day to 97,000 bbls/day. The group has ample liquidity and generated CAD 92 million in free cash flow in the first half of the year. The company exited the quarter with an undrawn credit facility and a cash balance of CAD 120 million. Going forward, we expect a gradual in recovery in crude oil and natural gas demand driven by easing in lockdown restrictions which is likely to support the oil prices and the group's performance in coming days. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Oil & Gas) average on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 3.02 on September 17, 2020.

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

Whitecap Resources Inc

Whitecap Resources Inc. (TSX: WCP) is a Canada based company which operates in the exploration and production of oil and natural gas. The group receives the majority of its revenue from crude oil segment, while a part of the revenue is being derived from NGLs and Natural gas.

The company declared a monthly dividend of CAD 0.01425 per common share, payable on October 15, 2020.

Key Highlights of Strategic Alliance with NAL Resources Limited:

• The company has entered into an agreement in an all-stock transaction valued at approximately CAD 155 million with NAL Resources, which has oil and gas operations in Alberta and Saskatchewan with a production capacity of ~27,000 boe/day. The deal is likely to close in January 2021.
• The above deal is in line with the Whitecap's long-term strategy of consolidating assets in its core operating areas. NAL's production and lands overlap more than 80% of Whitecap's current asset base and provide for meaningful operational synergies and inventory optimization opportunities.
• The Transaction is expected to lower down the company's leverage ratio by ~25% in 2021 and would increase financial flexibility. The group will elect to maintain its credit capacity at CAD 1.77 billion pro forma the Transaction and, with expected net debt of CAD 1.1 billion.
• The consolidated group is expected to produce average production of 60,000 boe/day in 2021, with an expected capital investment of CAD 200 million to CAD 250 million. Furthermore, the deal would enhance the accretive to free funds flow. Based on USD 45 per barrel WTI, the pro forma entity is expected to generate over CAD 196 million in free funds flow in 2021

Risks: The Company's business is exposed to the volatility in natural gas and crude oil prices, and the demand is directly correlated with the demand from the manufacturing and industrial sectors. The recent lockdown has dampened the realization prices and subsequently the top-line. Any setback to lockdown easing or further breakout of the novel virus would hamper the demand for oil and natural gas, which would further impact the operating performance of the company.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock tumbled ~52% so far this year, due to a steep correction in the international crude-oil prices on account of closure of several economic activities. Strategic collaboration with NAL would increase the company's presence across high-quality core assets. Further, the group is in an enviable position with many competitive advantages including strong balance sheet; high funds flow netback assets, shallow production decline rate and depth and quality of inventory to support the fully-funded business model. Amidst a lower demand scenario, the company has maintained its production volume, which is commendable. Meanwhile, with gradual improvement in oil prices, the company is expected to deliver a better top-line, going forward. Despite a challenging quarter, the group declared a dividend amid a time when most of the businesses are cutting or suspending the dividend. This shows the financial flexibility of the business. At the last traded price, the was offering a dividend yield of 6.38%, which is lucrative considering the prevailing interest rate scenario. The stock made a speedy recovery and soared ~188% in the last six months. We have valued the stock using Price to CF based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered industry (Oil & Gas) average on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 2.68 on September 17, 2020.

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

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