Does Bonterra Energy Corp. Offer Investors a Solid Bet on a Rebound in Oil Prices?

Looking for an attractively priced energy company that is well positioned to survive the oil rout? Then take a closer look at Bonterra Energy Corp. (TSX:BNE).

| More on:
The Motley Fool

Investing in small-cap stocks can be one way of giving your portfolio a much-needed boost in difficult times, with many of them set to deliver outsized returns when compared to larger stocks. One small-cap energy stock that stands out after the carnage created by the oil rout is Bonterra Energy Corp. (TSX:BNE). 

Now what?

Bonterra’s results for the full year 2014 did not meet The Street’s expectations, with net earnings falling by 42% year over year to $1.21 per share. This significant drop can be attributed to markedly weaker commodity prices, with oil plunging to its lowest point in five years during the final quarter of 2014.

Production costs over the course of the year also edged higher to be up by 9% year over year, although the company expects these to fall in 2015 as it focuses on cutting costs and driving synergies across its operations.

More importantly for investors, Bonterra has amassed a sizable and high-quality asset base with oil reserves of 80 million barrels that are 71% weighted to crude and natural gas liquids. These reserves have been independently assessed to have a value of $1.3 billion before tax or $41 per share. This represents a 15% premium over its current share price, highlighting that the company is undervalued.

More importantly, the company has a conservative approach to debt, and despite recently completing a $172 million acquisition in the Pembina Cardium formation, it has a low degree of leverage with net-debt of less than one times cash flow. This gives Bonterra considerable financial flexibility. The importance of this can’t be stressed enough in a difficult operating environment dominated by weak crude prices.

The quality of this asset base has also allowed Bonterra to continue growing its oil production. For 2014 production grew by 8% and I expect this to continue into 2015, particularly with it having acquired an additional 1,800 barrels of crude production daily as part of its latest Pembina acquisition. This will help to make up for any shortfall in cash flow caused by the oil rout.

Of greater interest to investors is Bonterra’s dividend that currently yields a juicy 5%. Even in the current harsh operating environment, this dividend appears to be safe, as the company has already accepted reality and slashed it by 50% earlier this year. Nonetheless, with Bonterra committed to maintaining the dividend at 50-60% of cash flow, a further dividend cut is likely should oil prices fall further or remain at current lows for a sustained period.

So what?

With Bonterra’s share price off by 34% over the last year, it does appear to be attractively priced with an enterprise value of six times EBITDA and 17 times its oil reserves. That being said, it is still subject to the same risks that any small-cap oil producer is subject to in this harsh operating environment, despite its solid balance sheet. However, I do believe that Bonterra offers investors an opportunity to invest in a quality oil company that has made all the right moves thus far and should pay off over the long term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Dividend Stocks

dividends grow over time
Dividend Stocks

2 Dividend Stocks That Can Generate $2,000 in Passive Income by 2025

Investing in high-dividend stocks such as Whitecap can help you generate $2,000 in annual passive income by 2025.

Read more »

edit Woman calculating figures next to a laptop
Dividend Stocks

Should You Invest in BCE Stock for its Dividend?

BCE stock is not yet out of the woods. But this article could change your perspective about the stock and…

Read more »

sale discount best price
Dividend Stocks

Bargain Hunting for Dividends: 3 High-Yield Stocks Haven’t Been This Cheap in Years

Enbridge (TSX:ENB) stock's key enterprise value multiple reached a new multi-year low recently. BCE remains a high-yield dividend play while…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Cash in Your Pocket: 3 TSX Dividend Stocks That Pay Out Monthly

Bolster your monthly income with these three dividends stocks that act like regular paycheques.

Read more »

A plant grows from coins.
Dividend Stocks

Beat the TSX Index With These Cash-Gushing Dividend Stocks

These cash flow-rich stocks are more likely to gush passive dividend income streams long into the future.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Here Are My Top 5 Dividend Aristocrats to Buy Right Now

Canadian National Railway (TSX:CNR) is a Dividend Aristocrat with 27 years of dividend growth.

Read more »

Woman has an idea
Dividend Stocks

The Smartest Canadian Dividend Stocks to Buy With $500 Right Now

Besides their years-long dividend-growth track record, the strong fundamentals of these Canadian dividend stocks make them really attractive to buy…

Read more »

retirees and finances
Dividend Stocks

No, the CPP Didn’t Squander $46 Billion of Taxpayer Money

The Globe and Mail claimed that the CPP Board mismanaged Canadians' money, but it beat the returns earned by the…

Read more »