Seven Generations Energy Ltd.

Seven Generations Energy Ltd. (TSX: VII) is a Canada-based energy producer, focuses on exploration, development and production of oil and natural gas properties in western Canada. The company employs long-reach and horizontal drilling to produce natural gas, condensate, and natural gas liquids. 

Key highlights

• Higher demand for Condensate: The company is a low-cost energy producer generating strong returns from condensate. In Canada, Condensate’s total demand for 700+ Mbbl/d is exceeding local supply by 275 Mbbl/d. Hence, there is enough room to tap the opportunities in this space.

Source: Company

• Achieving operational excellence:The company is pursuing innovations that drive long-term improvements to the business and free cash flow. The group is bringing down the drilling costs, completion costs, and operating costs regularly.

Source: Company

Healthy liquidity: In Q3 2020, the Company had available funding of CAD 1.1 billion, primarily consisting of undrawn credit facility capacity maturing in 2024. On the other hand, net debts stood at CAD 2.18 billion in the books, with approximately half of the Company's senior notes maturing in 2023 and the remaining half maturing in 2025. In the near term, the group plans to reduce net debt with available free cash flow, which would help bring down the interest cost and raise the margins. 

Financial overview of Q3 2020 (millions of Canadian dollars)

Source: Company

• In Q3 2020, the Company recognized revenue of CAD 568.9 million in liquids and natural gas sales, decreased by CAD 111.3 million compared to CAD 680.2 million in Q3 2019. The decline was due to lower realized prices and lower volumes.
• Condensate's realization cost stood at CAD 47.40 in Q3 2020 as against CAD 65.59 in Q3 2019.
• In Q3 2020, Loss before tax reported by the Company stood at CAD 100.2 million against a profit of CAD 127 million in the previous corresponding period.
• Net Loss posted by the Company in Q3 2020, was of CAD 66.8 million against a profit of CAD85.1 million in the pcp. 

Risks 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 include low demand for oil and gas, and financial risk on behalf of their hedged positions.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock recommendation

The management has raised its full-year 2020 production guidance in the range of 180-185 Mboe/d, compared to its prior guidance, keeping capital investments unchanged at CAD 650 million. Additionally, the operating cost guidance has been reduced from CAD 4.50-CAD 5.00/boe to CAD 4.50-CAD 4.75/boe. We expect a gradual recovery in the oil & gas demand, which is likely to impact the group’s performance positively. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 6.19 on December 23, 2020. We have considered Tourmaline Oil Corp, Paramount Resources Ltd, ARC Resources Ltd, etc. as the comparison's peer group.

Source: Refinitiv (Thomson Reuters)

Pizza Pizza Royalty Corp.

Pizza Pizza Royalty Corp. (TSX: PZA) owns and franchises quick-service restaurants under the Pizza Pizza and Pizza73 brands and has more than 600 traditional and non-traditional restaurants.

Management Updates:

Recently, the company announced that Christine D'Sylva had been promoted to Chief Financial Officer of PPRC and PPL, with effective January 1, 2021.  Furthermore, Curt Feltner, longstanding CFO, is transitioning into a new senior management role at PPL as SVP Strategy & Analytics.

Key Highlights:

• An income Play: The company has a solid history of dividend payments, which indicates stable income and cash flows. For the month of December 2020, the group announced a monthly cash dividend of CAD 0.055 per share. The stock of PZA carries an annualized dividend yield of ~7.253%, which would attract several income investors.

Source: Company Reports

• Sequential growth in System Sales: The company reported an increase in system sales in Q3FY20, at CAD 125.384 million, from CAD 113.506 million in Q2FY20. The improvement was driven by higher sales volumes owing to the gradual reopening of the stores with the addition of new stores. The Management expects increase in the restaurant network coupled with the increased renovations in 2021. Hence, with higher stores availability, the company would be able to cater to a higher number of customers through its physical store presence and through its delivery medium.

Source: Company Reports

Q3FY20 Financial Highlights:

• PZA announced its quarterly results, wherein the company posted royalty income of CAD 8.145 million, lower than CAD 8.966 million in the previous corresponding period (pcp). The overall decline in royalty income from the restaurants in the Royalty Pool is majorly due to the negative impact of COVID-19.
• Operating earnings stood at CAD 7.988 million, versus CAD 8.858 million in Q3FY19. The decline was majorly attributed to a lower income and a higher administrative expense (CAD 0.157 million versus CAD 0.108 million in pcp).
• Net earnings stood at CAD 6.108 million, as compared to CAD 6.783 million, a year ago.
• The company posted a cash balance of CAD 1.445 million, while total assets stood at CAD 360.589 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s income might affect by the continued restriction and prolong closure of stores due to the spread of COVID 19. Furthermore, due to increasing social distancing norms and change in consumer preferences, the company might witness a slide in its sales volumes.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

The company’s operation has been benefited from improved total system sales from the previous quarter on account of improved traction. The company took prudent measures and has permanently closed 15 traditional and 15 non-traditional restaurants during 9MFY20. As the Government has lifted the ban of restrictions on commercial construction, the company expects an expansion in its network and higher renovations in 2021, which augurs well for increasing sales volumes. The stock closed above the long-term support levels of 100-days, 150-days and 200-days simple moving averages (SMA), indicating a bullish trend. We have valued the stock using Price to Earnings-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry median (Consumer Cyclicals) on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 9.18 on December 23, 2020.

PZA Daily Technical Chart (as on December 23, 2020). Source: Refinitiv (Thomson Reuters)

Disclaimer

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