Troubled intermediate light oil producer Lightstream Resources Ltd (TSX: LTS) recently reported its second-quarter results for 2014 and despite some impressive improvements, saw its share price punished by the market.
Why did Lightstream’s share price plunge?
The company’s share price plunged a massive 10% after the results were released to the market with the company revising its 2014 guidance downwards. Revised full-year crude production is now expected to be 41,000 to 43,000 barrels daily, or a 5% drop compared to the previously issued guidance. This will obviously impact revenue, cash flow and the company’s bottom line, although funds flow from operations is expected to remain unchanged.
Yet unlike its troubled peer Penn West Petroleum Ltd (TSX: PWT)(NYSE: PWE), Lightstream continues to report solid results, as its turnaround strategy is gaining traction while seeing material improvements in the company’s performance.
Latest quarter results were impressive
While crude production declined for the fifth consecutive quarter, which impacted sales volumes and revenue, the company’s net income grew almost five times compared to the previous quarter. It also beat estimates for that period by a stunning 89%, primarily on the back of higher crude prices and a significant growth in the profitability of its production.
More importantly Lightstream’s production mix continues to remain heavily weighted to higher margin light and medium crude, which made up 80% of its total production for the first half of 2014.
This is in stark contrast to Penn West, which has a considerable portion of its crude production weighted to lower margin natural gas and heavy crude, with light oil only making up 45% of its total production. The remainder is split between heavy crude at 12% and natural gas at 36% of the production mix.
Lightstream’s production weighting to light oil is a key driver of its very healthy netback per barrel, which is a key measure of profitability for oil producers. For Q2 2014, Lightstream reported a netback of $57.49 per barrel, which is a 2.5% increase quarter-over-quarter and 15% year-over-year.
It is also one of the highest netbacks in the patch underscoring the high quality of Lightstream’s assets and profitability. It is significantly higher than Penn West’s netback of $36.67 for the first quarter 2014.
Lightstream continues deleveraging and reducing costs
Lightstream’s asset divestment program also remains on track with gross proceeds of $351 million from the sale of assets completed since the program commenced in November 2013. These proceeds have been used to reduce the company’s degree of leverage with total debt at the end of the second quarter 2014 being $1.9 billion or a healthy 12% decrease quarter-over-quarter and 11% year-over-year.
This leaves Lightstream with net-debt of 2.8 times cash flow, with the company targeting net debt of 1.5 to two times cash flow when the divestment program is completed at the end of 2015. Lightstream’s balance sheet continues to grow stronger and the interest cost associated with servicing its debt continues to fall, causing overall expenses to decline and cash flow to grow over the long term.
Finally, Penn West now finds itself engulfed in an accounting scandal with a number of law firms seeking to launch class action lawsuits against the company. At best this will be an expensive diversion for Penn West as it seeks to clarify the degree of fraud and defend itself against the lawsuits.
Lightstream is firing on all cylinders and despite the market being unimpressed by its new 2014 guidance, the company continues to reduce leverage and grow the profitability of its operations. This will eventually see it report better than expected financial results, which will boost its share price over the long term.
All of these factors also make it a far superior bet than Penn West for investors seeking exposure to light oil exploration and production in the patch.
