Despite years of relative calm, it seems like volatility is here to stay in the oil markets. Even after rising nearly 40% in the past 90 days alone, oil prices are still down about 50% from their highs a year ago. Daily moves in excess of 1-2% are becoming the norm.
During times of uncertainty, it’s important to stick with operators that have a proven history of navigating turbulent markets. Three key characteristics that indicate a winner include consistently rising output volumes, a dedication to lowering production costs, and an unwavering level of insider ownership.
Fortunately, it looks like Bonavista Energy Corporation (TSX:BNP) displays all three.
Rising output volumes
Bonavista has been able to cost effectively raise production volumes and reserves by over 6% annually this decade. Despite an impressive track record of organic growth, management anticipates growing this by another 8% per year for the next five years. This growth is driven by six major projects that are expected to contribute 80% of production by 2020.
Lowering production costs
Since 2008, Bonavista has focused a majority of development spending on core properties that have displayed the lowest costs of production. This has allowed production from core properties to grow from 25% of volumes to today’s 83% in only five years.
The effect of this transformation has been phenomenal for Bonavista’s cost structure. Production costs in core areas are down over 60% since 2008, falling 25% in the past three years alone.
The cost of adding new production has also plummeted. After hitting a high in 2012, management refocused the company to drive the cost of adding production down almost 50% in just two years. If energy prices remain depressed, Bonavista looks very well insulated.
Impressive metrics relative to peers
Bonavista’s closest peers include Baytex Energy Corp., Crescent Point Energy Corp., Enerplus Corp., Lightstream Resources Ltd., Pengrowth Energy Corp., Penn West Petroleum Ltd., and Peyto Exploration & Development Corp.
Among this peer group, Bonavista stands up as one of the best. It has the second-lowest cost of production and also the lowest cost of adding new production volumes. While its competitors may trumpet their high-growth prospects, nothing protects profits better in times of trouble than low expenses.
An experienced and incentivized management team
While the current CEO has been at the helm for almost 16 years, the rest of Bonavista’s management team have average tenures of over a decade. Not only do they have significant amounts of operating experience, but insiders also own 11% of all outstanding shares.
This ownership level aligns executive interests with shareholders. For example, no executive has a salary of over $1 million. Instead, they achieve a much higher financial reward from returns on the company’s stock.
A barrier to volatility
Even the best experts have had trouble predicting commodity prices over the past few years. To protect yourself, it makes sense to invest in companies that have a proven operating history and ability to lower costs to compensate for lower prices. Bonavista displays all of these attributes, as well as a management team well incentivized to continue executing in the future.
