Despite a recent decline in commodity prices, Canaccord Genuity analyst Mike Mueller continues to see intriguing investment possibilities in the Canadian exploration and production sector heading into 2023. “It is no secret that 2022 has marked an exceptional year for the sector, with the S&P/TSX Capped Energy Index up approximately 47 per cent year-to-date and up 53 per cent compared to the S&P/TSX 60 Composite Index,” he said. “This appears even more remarkable after noting that this comes on the back of 2021 where the energy index was up 82 per cent on the year.
“Given this backdrop, we believe that investors have an opportunity to generate alpha when looking outside the broad sector/large-cap names given our views that: most of the “easy wins” off the bottom of the pandemic lows have likely been realized; and valuations remain compelling, with our E&P coverage trading at 2.6 times 2023 estimated EV/DACF [enterprise value to debt-adjusted cash flow] relative to historic multiples of 4.6 times and despite balance sheets being in far better shape sector-wide.”
In a research report released Thursday, Mr. Mueller initiated coverage of I3 Energy with a “buy” recommendation while resuming coverage of five other stocks.
For Calgary-based I3, an independent oil and gas company with assets and operations in the United Kingdom and Canada, he touted its “broad asset based with a focused strategy.”
“Since 2020, i3 has assembled a strong foothold in Canada, growing production from zero to more than 23,000 barrels of oil equivalent per day,” he said. “i3 was an aggressive consolidator through the downturn, completing $100-million of deals across Alberta in 2020/2021 at attractive multiples of 0.5-1.4 times NTM NOI [next 12-month net operating income]. i3 has now shifted its focus to developing these assets through the drill bit and selling production into stronger pricing, leading into its plan to allocate up to 30 per cent of FCF to its monthly dividend while reinvesting the balance into organic growth through development of its existing assets.”
Mr. Mueller said the company’s dividend “was, is and will be a focus” for investors.
“The rationale for i3 picking up its initial ‘starter pack’ of producing assets in 2020 was to enter the Canadian market, consolidate assets at the cycle-bottom, and position itself as a shareholder-friendly, dividend-focused company,” the analyst said. “While this has become increasingly common in the domestic E&P space, at the time this was relatively uncommon amongst its domestic small/mid-cap peers. i3 intends to distribute up to 30 per cent of annual FCF to shareholders via its monthly dividend, which currently sits at $0.0023/share, reflecting a yield of 8.2 per cent. Next year, the company has indicated plans to distribute £20.4-million ($40.3-million), or $0.034/share on an annualized basis, reflecting a yield of 10.2 per cent on Monday’s close.”
“With the company’s history as a London-based North Sea exploration company prior to its entry into the Canadian market in 2020, we believe i3 has flown under the radar of many Canadian investors. The rapid growth over the past (nearly) three years has been impressive, particularly looking back at the timing of its acquisitions, which have proven the company’s astute and measured strategy to be successful. We believe that as i3 continues to demonstrate operational acumen and garner more attention from the market, that a multiple re-rate will be justified.”
He set a target for I3 shares of 70 cents.
“We believe i3 offers investors an attractive yield at 8.2 per cent, with a strong balance sheet [0.2] times D/CF) and organic growth optionality across its Clearwater and Simonette Montney assets at an attractive 1.8 times 2023 estimated EV/DACF multiple,” he said. “In our view, the potential for a re-rate on i3′s shares is better than most, given the company is in the early innings of its development strategy.”