While markets struggle to find direction amid rising uncertainties, energy remains among the very few vibrant sectors. Oil and gas producers are having a gala time with record financial growth and firm balance sheets not seen in decades. A standout stock in the Canadian energy space has been NuVista Energy (TSX:NVA). This mid-cap gas-weighted stock has returned 18% in the last 12 months and a massive 1,800% since the pandemic.
NuVista Energy: Will it continue to outperform?
NuVista Energy also produces condensate and natural gas liquids in the Montney formation in the Alberta Deep basin. It produced 68,690 barrels of oil per day last year, almost 31% higher than in 2021. Out of the total production, 58% was natural gas, 33% condensate, and 9% natural gas liquids.
NuVista posted free cash flows of $425 million in 2022, implying a massive 750% increase against 2021.
Canadian energy companies have shown noteworthy capital discipline in the last few years. Shareholders were delighted with higher returns and relatively lesser focus on higher production. Notably, energy exploration and production companies saw solid improvement in their balance sheet positions with record-low leverage.
Energy was among the highly leveraged sectors in the pre-pandemic period and, thus, scarcely created any long-term shareholder value. However, the situation turned upside down for the better. Since late 2021, energy companies have been among investors’ favourites. Their earnings visibility and much lower debt levels have revitalized investor sentiment.
Deleveraging and growth prospects
NuVista saw its net debt decline to $171 million at the end of Q4 2022, an improvement from $480 million at the end of 2021. As the debt position looks manageable, the company aims to invest 75% of its free cash flows into shareholder returns this year. So, we might see more share buyback activity from NuVista this year.
Share buybacks have been the preferred choice of energy companies for creating shareholder value since last year. As they saw steep free cash flow growth last year, many initiated share repurchase programs, indicating that their stocks are undervalued. Moreover, buybacks will boost the stock price in the near term, also boosting the company’s per-share earnings. In 2022, NuVista bought back 13.5 million shares for a total cost of $157 million.
For 2023, NuVista expects to invest $435,000 in capital projects and aims to produce 81,000 barrels of oil equivalent per day. That represents a 4% annual increase in capex and an 18% growth in production.
Bottom line
NVA stock is currently trading at a price-to-earnings ratio of 5x and looks undervalued. It is trading at a free cash flow yield of 14%. As natural gas prices have been weak, NVA stock has corrected by 15% since November 2022.
However, as gas prices are expected to turn higher later this year, NVA stock might follow. Higher production in the strong price environment will likely drive stellar financial growth for NuVista Energy. Plus, a remarkably improved balance sheet and financial growth visibility, coupled with share buybacks, could drive shareholder value in 2023 and beyond.
