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A Recession Is Coming: Laugh Your Way to the Bank With This 1 Stock

Storm Resources (TSX:SRX) is a crude oil and natural gas exploration and development company that operates primarily in British Columbia. It has a current market capitalization of $165 million with a 52-week high of $2.56 and a 52-week low of $1.14. The company reports a decent amount of insider ownership, which is always a good sign.

Most people are weary about investing during a recession, but if you time your purchase correctly, Storm Resources will bear very sweet fruit.

An interpretation of the numbers

For the six months ended June 30, 2019, the company reported a good balance sheet with $10 million in retained earnings. Compared to many of its peers, Storm Resources has generated more years of net income than net loss, which signals to investors it is a consistently profitable company.

Its total assets have increased from $566 million to $573 million due to a $22 million increase in PP&E. This signals to investors that the company is continuing to grow. Total liabilities are down $2 million, driven by a reduction in accounts payable and accrued liabilities from $34 million to $29 million. This is a good sign for investors, as it shows that management is focused on fiscal responsibility.

Looking at the income statement, revenues for the period decreased from $94 million in 2018 to $78 million in 2019 driven by an $8 million loss on risk-management contracts. Overall revenues from product sales are down $7 million from $100 million to $93 million in 2019. The company reported a pre-tax income of $12 million, up from $6 million the prior year. This resulted in after-tax income of $8 million, up from $6 million in 2018.

The company’s cash flow statement continues to be solid with operating cash flows of $42 million, down from $46 million the prior year. It’s capital-expenditure spending increased $14 million from $25 million to $39 million. The company reports an ending cash balance of nil.

But wait, there’s more

Looking at the company’s notes to its financials indicate a couple of important items.

Firstly, the company has access to a revolving credit facility of $205 million. It also issued letters of credit for $10.2 million in support of future natural gas transportation and processing obligations. The company had $85 million drawn on the credit facility as at June 30, 2019. Despite the company ending the period with nil cash, I am not concerned with the company’s ability to repay its creditors and operate the business, as $120 million remains undrawn on the line (excluding the letters of credit).

Secondly, the company derives the majority of its revenues from natural gas (67%), which means its revenues are being hit hard by the natural gas slump. When the natural gas price recovers, investors can expect to be generously rewarded by buying shares of this stock. The company mentions that 81% of its total revenues are accounted for by two major energy customers. This is slightly concerning to me, as it indicates the company has economic reliance on these customers for its products. I believe that this exposure will hurt the company in the short run, but as natural gas prices recover, investors stand to benefit.

Foolish takeaway

Investors looking to diversify their portfolio and purchase shares of an oil and gas company should consider buying Storm Resources. Given its positive retained earnings (a rare feat in the oil and gas industry) coupled with its increased capital-expenditure spending, investors stand to benefit by investing in this stock.

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Fool contributor Chen Liu has no position in any of the stocks mentioned.

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