Parkland Fuel Corporation

Strong Assets, Financial Strength, and Proven Track Record Drive the Business Performance: Parkland Fuel Corporation (TSX: PKI) is Calgary, Canada-based independent supplier and marketer of fuel and petroleum products, and a leading fuel & convenience store marketer. The business provides services through three channels: retail, commercial and wholesale across North America. The group has operations in more than 25 countries with 2,652 retail service stations and 337 commercial locations.

Highlights and Business Strategies:

• Recently, the group confirms its acquisition of ConoMart Super Stores. The acquisition consists of seven retail stores sites located in and around Billings, Montana. The acquisition would help the group in expanding the Montana business and scales the current Northern Tier Regional Operating Center. The acquisition is expected to be complete in 2Q2020. In FY19, the group completed the acquisition of KB Oil, Tropic, and Mort Distributing.

• The management announced a monthly dividend of CAD 0.1012 per share, which will be paid on 15^th April 2020. During FY19, the business paid a gross dividend of CAD 177 million while the dividend payout ratio stood at 38% in FY19. 

• The group made a growth capital expenditure attributable to Parkland of CAD 221 million in FY19, which consists of network development and enhancing the customer value proposition in the Canada Retail segment.

Outlook: For FY20, the group expects adjusted EBITDA of ~CAD1,130 million, with an anticipated variance of up to 5%. Further, the company expects to invest around $275 million in maintenance capital expenditures attributable to Parkland. The Capital Program of 2020 supports the annual average Adjusted EBITDA organic growth target of 3%-5% and is focused on network development, increasing digital presence, improving customer value proposition, improving the supply & logistics capability, and investing in the low carbon advantage.

FY19 Financial Highlight for the Period ended 31^st December 2019:

Key FY19 Financial Highlights (Source: Company Reports)

PKI announce its full-year results, wherein the company reported sales and operating revenue of CAD 18,453 million, as compared to CAD 14,442 million in the previous financial period. The increase was driven by strong performance within the supply segment primarily driven by safe and reliable operations at the Burnaby refinery followed by strong refining margins and consistent execution of integrated logistics operations. Adjusted gross profit stood at CAD 2,832 million, as compared to CAD 1,995 million in FY18. Net earnings improved drastically to CAD 414 million, as compared to CAD 206 million in the previous corresponding period.

Valuation Methodology: EV/EBITDA - Based Relative Valuation

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

Stock Recommendation: The stock of PKI is trading at CAD 24.20 with a market capitalization of 3.58 billion. The stock is quoting at the lower band of its 52-week trading range of 17.57 and 49.22, respectively. During the last three months, the stock price corrected by ~49.68%, but improved in the last five trading sessions. At current market price, the stock has a dividend yield ratio of 5.02%. The business has built a strong supply advantage across its entire business which is strengthened by proprietary assets, supply flexibility and logistics and trading facilities. The group seek to improve its margins by leveraging its scale and product diversity. While gasoline and diesel demand continue to grow in the key markets, the group recognize the need and opportunity to transition to lower-carbon energy sources. In 2019, the company made progress on several fronts. Parkland Fuel was the first Canadian refiner, which consistently co-process bio feedstocks and producing enough to run 10 thousand cars for a year on renewable fuels. PKI continues to focus on growing the non-fuel business in all markets and also saw growth in the carbon trading business. We have valued the stock using EV/EBITDA based relative valuation method. We have considered peers like Keyera Corp (TSX: KEY), Inter Pipeline Ltd (TSX: IPL), Gibson Energy Inc. (TSX: GEI) etc. and arrived at a target price which offers a lower double-digit upside (in % terms). Hence, we recommend a “BUY” rating on the stock at the current market price of CAD 24.20, down 8.16% as on 27 March 2020.

PKI Daily Technical Chart (Source: Thomson Reuters) 

Tourmaline Oil Corp.

Improved Guidance and Strong Cash Flow Generation to Improve Business Performance: Tourmaline Oil Corp. is engaged in exploration, development and production of petroleum and natural gas properties across the North American region.

Highlights and Business Outlook:

• The group is looking for the opportunities to acquire business owing to lower valuation prevailing in the industry. For this, the group has created an ‘acquisition line’ of CAD 800 million to CAD 1.2 billion. 

• The group has a well-diversified revenue base, which includes rapidly growing liquids volumes and a highly diversified gas transportation and distribution portfolio which aids multiple pricing points at hubs within the North America region.

• During FY19, the group reported total production of 291,296 boe/d, up 10% on y-o-y basis. The group reported higher production due to company’s successful exploration and production program. The increase in production was aided by significant growth in condensate and NGL production, followed by a significant increase in oil production due to the acquisition of assets in the Peace River High. 

• The company announced a quarterly dividend of CAD 0.20/share payable on 31^st March 2020. At current market price, the stock has a dividend yield of 6.16%.

FY19 Production Highlights (Source: Company Reports)

Outlook: For FY20, the group expects total production of ~3,20,000 Boe/day while the cash flow is expected at CAD 1,321 million. The management expects diluted cash flow per share (CPS) of CAD 4.87. E&P capital program is expected at CAD925 million, while free cash flow is expected at CAD 361 million.

Financial Highlights for the Period Ended 31^st December 2019: TOU declared its full-year results, wherein the company reported revenue of CAD 2,076 million, as compared to CAD 2,104 million in FY18. The decline in the revenue was due to an unrealized loss on the financial instrument. Total sales from production stood at CAD1,846.2, witnessed a growth of 8% on y-o-y basis. The increase was due to higher AECO natural gas prices and higher production volumes, which was partially offset by lower NGL revenue due to declines in the benchmark prices for propane, butane and pentane. Income from operations stood at $362.73 million, down from CAD 624.15 million in the previous financial period due to an increase in operating expense, higher transportation expense, higher marketing and depreciation expense. The overall rise in the expense head affected the bottom-line.

Stock Recommendation: The sharp correction in the prices of the company’s key offerings, i.e., crude oil & natural gas over the past couple of months, have led a significant plunge in its share price, during the same period. Natural Gas prices have been corrected about 44% from its peak of $2.90/mcf and, Oil prices have been corrected more than 67% from its 52-week peak of $75.60/bbl. A steep discount in the commodity prices would have a substantial impact on the group’s earnings and profitability in the near term. Also, a muted demand for oil and gas amidst COVID-19 pandemic will dent its performance more strongly in the near term. At the last traded price of CAD 7.81, down 9.3% (as on 27th March 2020), the stock traded approximately 66% away from its 52-week peak level of CAD 22.62, which reflects a bearish trend. However, if the world can find a cure for this novel virus in next few weeks, it would rejuvenate demand for the group’s offering, and oil and natural gas prices could also surge in the wake of demand coming back. Therefore, based on the above rationale we have given a “Watch” recommendation at the closing price of CAD 7.81 (as on 27th March 2020), while we look for the growth catalysts in near-term.

TOU Daily Technical Chart (Source: Thomson Reuters)

Disclaimer

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