Presentation reveals huge torque to $60 oil $10 stock in '22 Huge torque @ $60 oil in 2022.
Notwithstanding the sour grapes' analysis from the jilted OBE/Front Four ugly brides BNE new presentation underlines the inherent value that will be unlocked over the next 12 months.
Although there is no standard FCF definition it is generally accepted FCF is excess funds after maintenance capital, yet some schoolboy errors continue to persist about BNE's 2021 FCF. Eric Nuttal on this point defines FCF excluding hedging (as hedges roll) which allows for a much fairer comparison of OG stocks. As we see with BNE's presentation on page 6 Bonterra's production moves from a low water mark of under 10,000 BOED to approx. 15,000 BOED by the beginning of 2022. To model FCF we need to model and take into consideration this 50% production increase. BNE's sustaining capital based on 2021 average 13,000 BOED production to 13,500 BOED increase in 2022 is only 43 million. The 2021 $77 million capex budget is predominately growth capital harnessing 2021's FCF. BNE is a rare first mover energy growth stock capturing $60+ wti with increasing production. If we look to 2022, we see even with a higher 13,500 average production base the FCF generated in 2022 is $77 million at $60 oil. At approx. $2.30 FCF per share BNE should be trading above $6! Once debt has been normalized BNE could buy back all if its shares in just over 18 months which would make it a prime candidate for Eric Nuttals fund.(with financial engineering that could occur as he found ways to enter ATH,CJ & GXE)
A little more colour on BNEs page 6 production graph. Many Canadian OG stocks have either held production or have only had a tepid drilling response to $60+ oil. Bonterra has a head start on its peers not only capturing higher oil prices with a robust drilling program but also seeing improved well results. Essentially BNE is paying depressed Covid drilling day rates thereby improving their capital efficiencies and getting more bang for their production buck. If oil remains @$60+ I have no doubt budgets will be adjusted accordingly at the start of 2022 for many OG producers which will leave BNE with its head start in a unique position. My modelling suggests @$60-$70 oil BNE could maintain their 15,000 BOED high watermark or even potentially increase to 16,000 BOED with a $81 million 2022 capex budget and still produce over $70 million in FCF. At this juncture BNE debt to CF would be normalised to peer group averages in 2022. Let's look closer at the debt levels:
BNE only real concern is its bank line as the BDC by design is a friendly lender and it is the banks that are causing the most pain for the OG sector. The common theme from many CEOs is getting out from under the banks thumb screws forcing hedging and a whole host of other undesirable consequences. CEOs want their companies back and to run them in the best interests of shareholders which can only be done by reducing bank debt from unfavourable lenders. The BDC loans allow BNE to grow and payback bank debt (not necessarily overall nominal debt) but as this is the debt causing drag on many small cap energy companies stock price this is key to a rerating. By 2022 bank debt can be reduced to approx. $150 million @$60 oil thereby eliminating any risk posed by lenders. Why? General rule of thumb on BNE's current reserve value lender would loan between $200-$240 million. This would make them slightly offside in 2021 but comfortable onside by 2022, however this is based on Reserves Summary from December 31, 2020. It is well known by lenders and OG companies alike that this is the low watermark for reserves values are they were done at far lower sub $50 price decks. A midyear reserve report could put BNE within banking lending parameters and by 2022 with a higher price deck and only $150 million in debt they would be far under. If you have a neutral view on oil remaining at current strip pricing BNE should be a $10 stock in 2022 and if you are bullish oil ($70+) the stock should rerate far higher. Even at $50 oil in 2022 Bonterra will generate almost $1.50 per share in FCF so the downside is limited for those with a 12-month horizon.
While I am bullish on BNE it is just part of my oil and gas basket which has also include IPO,CJ,ATH,GXE,YGR, ATU & JOY. In larger cap I also like WCP & CPG. I will trade around my position and rebalance according to my modelling and wti, edm par and wcs.(plus aeco)
There are also about half dozen other names I will trade or add depending on news and modelling.
In internationals this includes PXT, TXP & TGL.
Admittedly there is currently a bit of softness in some OG stocks over the past month and this to me presents a buying opportunity. Once the shoulder season has passed and demand increases, I believe most OG names will be substantially higher. Take your pick and we shall see where we are in July.