Seven Generations Energy Ltd.
Q4/18 Recap: Decent Quarter Although Near- term Outlook Could Be Catalyst-light
Our Conclusion
Following the company's conference call and a more fulsome review of full-year disclosures, we have fine-tuned our forecasts, with minor changes to our cash flow and production expectations. With no change to 2019 guidance, we suspect modifications to Street forecasts should also be minor. Although the stock price would say otherwise, 2018 results were good overall in our view, including production-per-share growth of 14%, ROCE of 13%, and CFPS growth of 39%, all of which should rank favorably versus peers.
Despite the underlying business more consistently putting up numbers in recent quarters, the path for this stock continues to be a painful one. Although the company's reserve metrics were messy (as we highlighted in our "first look" publication), the lack of clarity on the company's infrastructure process was likely a prime source of frustration on the day. The potential proceeds on the disposition of VII's entire infrastructure footprint (~760 MMcf/d of processing capacity and 60 Mbbl/d of condensate stabilization) could be meaningful; however, given the company's balance sheet strength, we see little reason for management to take this path (at least in isolation). The more logical outcome in our view is one that serves to optimize the company's infrastructure capacity in a strategic manner, which could feature an additional revenue stream or cost optimization. That said, it is pretty clear that all options are on the table at this point, so it is tough to rule out one scenario over another. And although the conclusion of the process may not prove to be a material event, we do see a better-than-not likelihood that it is a forthcoming positive.
Our review of January data in the public domain also suggests that Q1 is off to a relatively good start, and although we maintained our H1/19 estimates, we do think Street expectations are low enough at this point that the potential for VII to outperform expectations is greater. While we still think the risk/reward level at the current valuation is skewed to the upside, we would not be surprised to see the stock trade sideways until production growth resumes in H2/19, and the Gold Creek process is complete.