Latest Earnings Show Now Is the Time to Buy This Oil Stock Yielding Over 7%

Buy Frontera Energy Corp. (TSX:FEC) today and lock in a juicy +7% yield.

| More on:
Oil pumps against sunset

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The last three years have been challenging for Frontera Energy (TSX:FEC) shareholders. After emerging from a bankruptcy restructuring with an almost debt-free balance sheet, the driller’s performance has been impacted by a range of operational legacy issues. Frontera has been steadily resolving those matters and moving forward with its plans to unlock value for investors. 

Solid operational results

The company reported some solid third-quarter 2019 results, despite missing on revenue and reporting a net loss of US$59 million, indicating that it is more than capable of generating value. Quarterly production grew by 6% year over year, while Frontera’s netback expanded by 15% to US$29.61 per barrel, despite weaker crude prices, which saw Brent average 18% less for the period.

That is an impressive performance, and the stronger operating netback, in defiance of weaker oil, can be attributed to Frontera’s hedging program.

The driller’s operating netback is also superior to that being generated by many of its peers operating solely in Canada, illustrating the considerable benefits of being able to access premium Brent pricing and lower operating costs. This also demonstrates that Frontera is capable of weathering weaker crude if another oil price collapse occurs, which some pundits are predicting for next year.

Those results saw Frontera reaffirm its revised August 2019 guidance where it anticipates average annual oil production of up to 70,000 barrels daily and EBITDA to be as high as US$575 million. That, if achieved, will represent a significant improvement over 2018 where Frontera reported full-year operating EBITDA of US$423 million. Such a solid 36% increase in operating EBITDA should give the company’s stock a substantial boost.

Frontera also finished the third quarter with a solid balance sheet, holding US$314 million in cash and long-term debt of US$330 million. The driller’s debt is a conservative 0.6 times trailing 12-month EBITDA, indicating that the degree of leverage is very manageable.

Frontera is also expanding its operations, having acquired two blocks in Colombia earlier this year; the VIM-22 Block in the Lower Magdalena Valley  and the LLA-99 Block in the prolific Llanos Basin. The company also acquired a 50% interest in two blocks in Ecuador in partnership with Chilean driller GeoPark. Those hydrocarbon concessions are in Ecuador’s Oriente Basin, a continuation of Colombia’s Putumayo Basin where Frontera has developed acreage to produce heavy oil, indicating that it possesses the necessary expertise to develop those assets.

Aside from these attractive characteristics, Frontera is particularly appealing because it is trading at less than half of its after-tax net asset value for its proven and probable oil reserves of $25 per share, indicating that there is considerable upside available. This steep discount can be attributed to an overbaked perception of risk associated with Frontera’s operations after production in Peru was impacted by an attack on the NorPeruano pipeline earlier this year.

There are also fears that Frontera will be negatively affected by rising geopolitical risk in Colombia. The last remaining major insurgent group in the Andean nation, the ELN, stepped up attacks on oil infrastructure even after the historic 2016 peace deal with the FARC. Growing unrest in rural areas has affected the operations of various oil companies since the start of 2019.

Another aspect of Frontera’s operations that enhances its attractiveness as an investment was management’s decision to start making dividend payments. It has paid out US$106 million in dividends this year, including a special August dividend of $0.54 per share, giving a juicy yield of 7.4%. That payment is contingent on Brent averaging US$60 per barrel over the period where the dividend is declared, which in the current operating environment where crude is rallying doesn’t present a threat.

Nonetheless, if oil prices were to collapse in 2020, as some pundits are predicting, then Frontera could cease making dividend payments.

Foolish takeaway

Frontera is a risky play on higher crude, while it is still struggling to attract positive attention because of its earlier bankruptcy and legacy issues, the driller is very attractively valued. There are also signs that many of the problems impacting Frontera’s operations have been resolved, indicating that it will deliver considerable value for shareholders.

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 of the stocks mentioned.

More on Dividend Stocks

energy oil gas
Dividend Stocks

2 High-Yield Energy Stocks to Buy as Recession Approaches

Energy stocks such as TC Energy and Canadian Natural Resources allow investors to generate income even in recessionary times.

Read more »

green power renewable energy
Dividend Stocks

3 Top Dividend Stocks to Drive Your Passive Income

These three high-yielding, safe dividend stocks could boost your passive income.

Read more »

protect, safe, trust
Dividend Stocks

TFSA Wealth: How to Earn $363 in Monthly Passive Income for Life

Canadian investors can harness the power of the TFSA to generate steady tax-free passive income for decades.

Read more »

Canadian Dollars
Dividend Stocks

TFSA Millionaire: How to Turn $40,000 Into $1.2 Million for Retirement

Here's how TFSA investors are using the power of compounding to buy top Canadian dividend stocks to build retirement wealth.

Read more »

edit Balloon shaped as a heart
Dividend Stocks

My 3 Favourite TSX Stocks Right Now

These three TSX stocks are my favourite performers. All have strong dividends, future growth, and historic performance behind them.

Read more »

Dividend Stocks

Passive Income Generator: 1 Dividend Stock Yielding 6.16%

A high-yield energy stock that pays monthly dividends is a reliable passive income generator for investors.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

3 Cheap Canadian Dividend Stocks to Buy Now for Passive Income

Investors seeking quality passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Oversold TSX Dividend Stocks to Buy for Passive Income

While these high-quality dividend stocks are oversold, they are some of the best stocks to buy for passive-income seekers.

Read more »