TD on VII Q1
Seven Generations Energy Ltd. Lower Montney Looks Interesting. TD Est $250mm in 2019 FCF. Event Q1 Results Impact: NEUTRAL Quarter Generally In Line With Expectations: Seven Generations reported Q1production of 197.4 mBOE/d, versus consensus (198.2 mBOE/d) and TD (202.4mBOE/d). These volumes were in line with the H1/19 guidance range. Although in line with guidance, volumes are down 8% q/q, with C5+ down 11% sequentially and 17% from Q2/18. CFPS of $0.95 fell between consensus ($0.93) and TD expectations ($1.01). Our View: The sharp erosion in C5+ volumes over the past two quarters are largely a product of the material H2/18 ramp in production required to meet the previous year's guidance. The 2019+ strategy is very different than the past. We expect volumes to stay flat from Q1 levels in Q2/19 and grow very modestly (5%) through H2/19, with capex below CF. Expect VII To Max Out its NCIB with FCF in 2019: We forecast $250 million of 2019 FCF - ~$80 million of which is likely to be allocated to the NCIB. No shares have been repurchased YTD. We believe that this is because Q1 capex exceeded CF by 1.2x. As we see capex moderate through H2, we would expect the company to become more active. It is authorized to repurchase an incremental 8.4 mm shares (~$80 million / 2% of S/O) on the existing 18.1 mm share NCIB that is valid until November 4, 2019. Recall, VII repurchased 9.7 mm shares at $10.72 in Q4/18. New Lower Montney Well Results Look Compelling & Confirms First Test: VII provided a follow-up Lower Montney IP30 rate of 1,250 BOE/d (788 bbls/d of C5+). This is comparable to the original triple-stack Lower Montney test released in Q3/18 - IP30 1,300 BOE/d (975 bbl/d of C5+). Our View: The Lower Montney has the potential to materially expand VII's C5+ inventory and Net Asset Value. There are currently only 7 Lower Montney locations booked in the 2P reserve report; however, the company has identified >170 2C. 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.