None of the previous oil rallies have been as rewarding for energy producers as the ongoing one. The recent strength in energy commodities has helped even the small-cap, more vulnerable companies to rise on a firm footing.
For example, consider small-cap oil and gas producer Surge Energy (TSX:SGY), an $830 million business with a target of producing 21,500 barrels of oil per day this year.
Surge has maintained its capital discipline during the supporting macro environment, which has notably improved its balance sheet strength in the last few quarters. As a result, SGY stock has doubled this year, beating Canadian energy bigwigs by a wide margin.
Surge Energy’s improving earnings and balance sheet
The company’s cash flow from operations increased from $15.6 million in Q1 2021 to $52.2 million in Q1 2022. That was a massive 236% growth year-over-year, even when production increased only 24%. Higher crude oil prices substantially benefited Surge and resulted in a huge cash flow expansion during the quarter.
Canadian energy companies are aggressively repaying their debt, making their balance sheets lighter. Surge Energy was no exception. It had a net debt of $407 million during 2020, which fell to $316 million at the end of Q1 2022. Declining debt saves on interest expenses, ultimately improving the company’s profitability.
Dividends
After its superior Q1 2022 results, Surge Energy announced an annual dividend of $0.42 per share. This implies a handsome dividend yield of over 4%, higher than TSX stocks.
Note that this dividend equals 20% of the company’s projected free cash flows for 2022. So, if the oil prices stay strong, Surge could increase its shareholder dividend in the near future.
This year, there has been a flurry of dividend raises in the Canadian energy sector. This is because energy producers are sitting on excess cash even after allocating enough for debt repayments and capital expenses. At the same time, crude oil prices do not seem to be waning anytime soon. So, these are indeed ecstatic, blissful times for energy producers and investors!
The Foolish takeaway
Importantly, although many Canadian energy stocks are currently trading at record levels, they still look undervalued. Solid earnings growth potential and lighter balance sheets could continue to unlock more value for shareholders.
Interestingly, TSX energy stocks do not seem to calm down when there’s record oil and gas prices. They reported record earnings growth when oil touched US$100 a barrel during Q1 2022.
So, imagine the impact when they report Q2 2022 results when oil is averaging around US$110 a barrel. That certainly means another quarter of superior free cash flow growth, faster deleveraging, higher dividends, and surging stock prices.
