Energy is among the few sectors with decent earnings growth visibility in 2023. Yet, while oil and gas production companies are reporting handsome financial growth, broader markets are seeing an earnings decline. Many sectors like consumer and banking have turned cautious and released a bleak outlook for 2023. Notably, energy companies have assertively issued a growth outlook for the next few years.
ATH stock outperforms TSX energy peers
Canadian mid-cap energy producer Athabasca Oil (TSX:ATH) is the latest one to report Q4 2022 earnings. It has remarkably outperformed its peers in the last few years. ATH stock has gained 45% in the last 12 months, while TSX energy stocks at large have soared 16%. Since the pandemic, Athabasca stock has returned a massive 2,200%.
For 2022, Athabasca Oil reported free cash flows of $161 million, marking a handsome increase from $102 million in 2021. Forecasting more solid financial growth ahead, the company has released an optimistic outlook for the next three years. Management expects $270 million in free cash flow in 2023 and a total of $1.1 billion through 2025.
That’s a 15% free cash flow yield, offering a decent value proposition. Many Canadian energy stocks currently offer a 12%–15% free cash flow yield and still look attractive. On the price-to-earnings front, ATH stock is trading at 3x and also looks discounted.
Despite such a steep surge since the pandemic, TSX energy stocks are appealing from a valuation standpoint, given their strong earnings growth and balance sheet improvement.
Financial growth and deleveraging
Energy-producing companies have grown into great shape since the pandemic. They were some of the highly leveraged companies with unstable earnings. But now, thanks to their steep free cash flow growth, they have repaid billions of debt. Deleveraging has been the theme across the sector. So, oil and gas companies will likely be well placed even in low-price environments, unlike the pre-pandemic periods.
Athabasca repaid over $170 million in debt in 2022. At the end of Q4 2022, it had net debt of $48 million, among the strongest leverage positions for the company ever. Due to a substantial decline in the debt balance, Athabasca will likely save millions on interest expenses, ultimately increasing its profitability.
As the company has overachieved its leverage target, Athabasca intends to allocate 75% of its free cash flows to shareholder returns. So, investors can expect strong buyback activity this year.
Athabasca Oil aims to produce 35,000 barrels of oil equivalent per day in 2023. The production is 93% liquids-weighted and has a low-decline asset base.
Athabasca produces heavy oil, which uses Western Canadian Select (WCS) as a reference price. Last year, WCS saw its differential widen compared to WTI oil, weighing on many Canadian heavy oil producers. However, this year, the differential is expected to narrow due to better refinery utilization and additional pipeline capacity coming online. A lower differential implies better realized prices for Canadian heavy oil producers like Athabasca and superior financial growth.
Attractive stock value
ATH stock looks appealing in the current environment, given its strong balance sheet, visible free cash flow growth, and undervalued stock. Buybacks and higher expected oil prices later in the year will likely create meaningful shareholder value.