Oil remains flat after OPEC announced a last-minute deal with its allies to cut production by 1.2 million barrels daily. The North American benchmark West Texas Intermediate (WTI) is trading at just over US$50 a barrel, while the international price Brent is trading at around US$60 per barrel. This, along with weaker fundamentals for crude, shouldn’t deter investors from the energy patch because it has created an opportunity for contrarian investors.
A driller that stands out is intermediate oil and natural gas producer Bonavista Energy Corp. (TSX:BNP). The company has lost over 41% for the year to date, almost four-times the 11% decline in the value of WTI, thereby highlighting the opportunity that decrease has created.
Now what?
Bonavista is focused on producing natural gas in Alberta’s Deep Basin and West Central plays, where it has reserves totalling 438 million barrels of oil equivalent, which are 71% weighted to natural gas. This, along with 70% of its production composed of natural gas, makes Bonavista an ideal play on higher natural gas prices, which have surged by 60% over the last three months because of unseasonably cold weather and a resultant sharp spike in demand for the fossil fuel in heating applications.
The substantial drop in Bonavista’s value can be attributed to its less than spectacular third quarter 2018 results, where it missed market expectations. The driller reported a 4% year over year decline in production to 68,036 barrels daily and a 2% decrease in its operating netback to $12.48 per barrel of oil equivalent produced.
As a result of those poor operational results, the impact of foreign exchange fluctuations and a $33.9 million loss on its commodity hedging contracts Bonavista reported a third quarter net loss of $17.8 million, which was roughly 10 times greater than the loss posted for the same period in 2017.
Nonetheless, Bonavista reiterated its full-year 2018 production guidance of 69,000 to 71,000 barrels of oil equivalent daily. It also increased expected adjusted funds flow at the bottom end of its projections by $10 million to $90 million because of higher than anticipated natural gas liquids pricing.
This is due to condensate prices that have been firmer than expected because of a notable increase in demand from oil sands producers for the natural gas liquid, which makes up 6% of Bonavista’s total production.
You see, in order to transport bitumen by pipeline, it needs to be made viscous through the additional of diluents, the most popular being condensate.
Bonavista’s reserves and production should grow at a healthy clip, as it is engaged in an extensive drilling program where it is targeting the expansion of its natural gas liquids and oil production. In its restated guidance, the company added an additional $15 million to the bottom end of its capital budget for exploration and development activities.
Additional higher margin liquids production will give earnings a healthy boost while minimizing the impact of the uncertainty surrounding the outlook for natural gas.
Bonavista is also focused on strengthening its balance sheet, having reduced net debt by $31.5 million to $795 million, 4% lower than a year earlier. While that’s a somewhat concerning 2.5 times trailing 12-months cash flow, it should continue to fall as cash flow grows because of greater production and firmer natural gas prices as well as Bonavista’s focus on using excess cash flow to reduce debt.
So what?
After being heavily marked down by the market in recent months, Bonavista is an attractively valued play on higher oil and natural gas. The driller’s operations are highly profitable, and its ongoing drilling program will bolster reserves as well as production, which will give its net asset value and earnings a healthy lift. For these reasons, Bonavista is an appealing play on firmer oil and natural gas.
