Seven Generations Energy Ltd.
(VII-T) C$9.58
Market Overreacted to Okay Quarter and Reserves
Event
Reports Q4 Results and YE-2018 Reserves
Impact: SLIGHTLY NEGATIVE
Quarterly Production and CF Generally In Line: Q4 production averaged 215.1 BOE/d, relative to TD (212.8 BOE/d) and consensus (211.8 BOE/d). CFPS of $0.93 modestly exceeded TD's forecast of $0.87, but fell shy of consensus ($0.96). From a CF perspective, C5+ generated Q4 field netbacks of $41/BOE relative to natural shale gas netbacks of $12/BOE. The takeaway is that C5+ is significantly more valuable than gas, which is important to consider when evaluating reserves.
Market Appears Focused on Y/Y Decline in 2P Reserves, We Believe This is Overly Simplistic: VII reported that 2P reserves declined 3% y/y. However, 2P liquids increased y/y by 9% and now account for 53% of 2P reserves (51% at YE-2017). We would have been more concerned if 2P reserves increased, but 2P liquids reserves declined. Relative to last year's reserves (assuming a consistent price deck), we calculate NPV8% increased 15% y/y.
PDP F&D Costs Imply Full-Cycle Profitability: We calculate a 2018 PDP F&D cost of $16.86/BOE. By adding 2018 cash expenses ($21.82/BOE) to this figure, we calculate an all-in 2018 production supply cost of $38.68/BOE. This provides for a full-cycle margin of 14%, when compared to 2018A revenue of $44.83/BOE.
Looking for Infrastructure Partnership that Could Potentially Include Infrastructure Other than the Gold Greek Facility: On the conference call, the company indicated that in addition to exploring partnership options for the newly-built 250 mmcf/d Gold Creek facility, it would explore options on its entire infrastructure package. Given the under-utilization of the Gold Creek facility (it was built prior to VII's lower-growth strategy), we would favour a Gold Creek facility transaction over agreements that could burden existing production/CF processed at fully-utilized plants with take-or pay commitments.
TD Investment Conclusion
VII's strategy of modest production growth, focus on growing FCF by moderating the decline rate, and ultimately returning capital to shareholders seems to be the correct direction for a company of its size/maturity. However, there is little investor appetite for Canadian energy equities. This has materially suppressed VII's valuation. For long-term investors, we believe that this could prove to be an attractive entry point