RE:Friday's analyst upgrades and downgrades? Northern Blizzard Resources Inc. (NBZ-T) provides investors with a means to leverage higher heavy oil prices, according to BMO Nesbitt Burns analyst Ray Kwan.
However, Mr. Kwan said he expects the stock to underperform its peers unless it is able to offset its dilution via a dividend cut and halting its Stock Dividend Plan or by resuming growth.
He initiated coverage of the stock with an “underperform” rating.
“Northern Blizzard is nearly 94-95 per cent exposed to medium/heavy oil crude and its products are priced near the Western Canadian Select (WCS) benchmark,” said Mr. Kwan. “The company also trades inexpensively, at 6.1x 2017 estimated EV/EBITDA (strip) versus peers at 9.5x, and provides investors with a greater-than 11-per-cent dividend yield. On the negative side, including the Stock Dividend Program (SDP), which is operating at a 75-per-cent participation rate, equity dilution is running at 8 per cent per annum at the current share price, pushing production per share in the negative territory (5-7 per cent in 2017/2018).”
Mr. Kwan emphasized the company’s link to crude oil prices, noting any downturn, like the one seen in 2015 and 2016, would have a significant impact on cash flow and bring “further” strain to its balance sheet “if the pace of development is not moderated and/or dividends are reduced.”
“Northern Blizzard uses WTI oil contracts to protect against movements in oil prices and WCS differential contracts to protect the realized price movements against changes in heavy oil diffs,” he said. “Note that approximately 63 per cent of Northern Blizzard's gross production is hedged at $80/bbl (Canadian) WTI for 2016 and 51 per cent at $69/bbl WTI for 2017.”
He added: “Northern Blizzard’s corporate production of greater-than19,000boe/d is 94-95 per cent exposed to mostly medium/heavy oil grade crude. If crude oil prices were to increase from strip prices today of $51 (U.S.)/bbl for 2017 to $65/bbl, assuming a WCS differential of $15/bbl, we would expect Northern Blizzard’s funds flow to increase approximately 20 per cent. Alternatively, for every $1.00 (Canadian)/bbl increase in WCS crude, Northern Blizzard’s cash flow could increase 5 per cent. Note that Northern Blizzard has hedged 51 per cent of its gross production at $69 (Canadian)/bbl WTI, limiting the company’s cash flow upside potential, at higher crude prices.”
He set a price target of $4 per share. The analyst consensus is $5.08