Seven Generations Energy Ltd. Takes a Contrarian Approach to Weak Oil Prices

Seven Generations Energy Ltd. (TSX:VII) opts to increase spending and boost production to deal with the oil price shock.

The Motley Fool

It’s a risky move that has some industry watchers worried, but Seven Generations Energy Ltd. (TSX:VII) has opted to sharply increase oil and natural gas production in an effort to take advantage of continuing weak crude oil prices.

In the second quarter, the company increased oil production 126% to 54,219 barrels of oil equivalent per day (boe/d) compared with the same period last year. Second-quarter oil and condensate production increased 123% to 20,702 barrels per day compared with a year earlier, while natural gas production levels jumped 117%. The higher production levels helped the energy company increase its cash flow to $126.8 million, up 92% from the second quarter of 2014.

“With the ongoing oversupply of natural gas across North America, we focus intensely on being among the continent’s lowest-cost developers,” said CEO Pat Carlson in the company’s earnings report. “Maintaining a margin throughout commodity price fluctuations has always driven and continues to drive our long-term growth strategy. When we combine our low-cost supply growth with our long-term, firm transportation and our fractionation capacity in the U.S. Midwest, we maintain our highly competitive position and can continue to grow production and funds from operations.”

Carlson says the company believes that oversupply drives down prices, but not demand. “Despite the current weakness in continental energy prices, developers generating the lowest-cost supply will continue to earn competitive returns for investors over the long term.”

Despite cutting spending by $300 million earlier this year, Seven Generations has opted to maintain its 2015 capital budget of $1.35 billion for its Kakwa River Montney natural gas project in Alberta, even as competitors continue to reduce spending and shed jobs. To maintain that financing, Seven Generations has issued $425 million in senior debt and has raised its revolving credit facility to $650 million.

The changes haven’t helped the company’s profits, at least so far. In the second quarter Seven Generations lost $22 million, or $0.09 per share, compared with a year-earlier profit of $44 million, or $0.20 per share. Excluding items, earnings were $28 million, or $0.11 cents a share, a penny above analyst predictions of $0.10 per share.

The question is, can Seven Generations spend its way out of trouble? Four of seven analysts covering the stock give it a “buy” rating, with an average price target of $23.58. Still, you’ll need a strong disposition to buy Seven Generations shares, which have declined 20% year-to-date. However attractive the contrarian approach might be, it remains a major risk that investors should consider carefully.

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 Doug Watt has no position in any of the stocks mentioned in this article.

More on Energy Stocks

engineer at wind farm
Energy Stocks

1 Canadian Utility Stock to Buy for Big Total Returns

Let's dive into why Fortis (TSX:FTS) remains a top utility stock long-term investors may want to consider right now.

Read more »

Canadian dollars in a magnifying glass
Energy Stocks

The Smartest Energy Stocks to Buy With $200 Right Now

The market is full of great growth and income stocks. Here's a look at two of the smartest energy stocks…

Read more »

Top TSX Stocks

A 6 Percent Dividend Yield Today! But Here’s Why I’m Buying This TSX Stock for the Long Term

Want a great stock to buy? You will regret not buying this TSX stock and its decades of growth and…

Read more »

ways to boost income
Energy Stocks

Act Fast: These 2 Canadian Energy Stocks Are Must-Buys Before Year-End

Here are two high-potential Canadian energy stocks with stable dividends you can consider adding to your portfolio before the year…

Read more »

canadian energy oil
Energy Stocks

2 No-Brainer Energy Stocks to Buy With $1,000 Right Now

If you have $1,000 to invest right now, CES Energy Solutions (TSX:CEU) and Enerflex (TSX:EFX) are no-brainer options.

Read more »

The letters AI glowing on a circuit board processor.
Energy Stocks

Maximizing Returns: How Canadian Investors Can Profit From AI’s Growing Energy Needs

Renewable energy stocks like Brookfield Renewable Partners (TSX:RNW) profit from AI's extreme energy usage.

Read more »

oil pump jack under night sky
Energy Stocks

3 No-Brainer Oil Stocks to Buy With $1,000 Right Now

The current geopolitical situation may not be conducive to oil price gains, but there are also positive catalysts.

Read more »

oil and natural gas
Energy Stocks

Best Stock to Buy Now: Suncor vs Cenovus?

Comparing Canada's energy giants: While Suncor stock dominated 2024, Cenovus could be a more compelling choice for 2025 with stronger…

Read more »