I am happy to announce a new addition to the Small Cap Triple-Threat Portfolio - Cardinal Energy (OTC:CRLFF)[TSX:CJ]. Of note, all financials and prices are in Canadian dollars unless otherwise note.
Full disclosure - I was very hesitant on adding another oil & gas stock to the mix. Total Energy (TOT) [TSX:TOT] was one of the original holdings of the portfolio and its performance has been a drag. Since being added, it has lost approximately 43% of its value and holds the distinction of being the portfolio.
The entire sector has been decimated and significant headwinds remain. However, after looking into the company a little be deeper, I saw an undervalued junior producer with a dividend that was well covered.
Overview
Cardinal Energy one of the smaller independent oil & gas companies. It is a Western Canadian pureplay with three operations in Alberta and two in Saskatchewan.
As a junior producer, the company is subject to significant volatility. As of writing, the company is trading at $2.00 per share. This is near its 52-week low of $1.80 and at a 75% discount to its 52-week high of $3.50 per share.
This past week, the company released third quarter results in which it missed on earnings ($0.00 vs $0.02). Revenue came in at $95.48 million, down 15.9% from the third quarter of 2018. All things considered however, it was a decent quarter for the company amidst significant headwinds.
The company delivered strong adjusted funds from operations [AFFO] of $27.6 million (+2%) despite the Alberta oil curtailment that led to a slight decrease (-4%) in production. Through the first nine-months of the year, it has generated $36.4 million in free cash flow which is being used to pay down debt and buyback shares.
A top value stock
Without question, Cardinal Energy is a value stock. True, most oil & gas companies can be considered cheap, yet Cardinal's undervaluation sticks out.
Although it is relevant to note that Cardinal hasn't been this cheap since it went public in 2014, most of its oil & gas peers are also trading at a significant discount to historical valuations. It is par for the course these days.
Where it sticks out is relative valuation as compared to its peers.
| | Cardinal | O&G Peers |
| Trailing P/E | 3.10 | 12.9 |
| Forward P/E | 14.64 | 14.30 |
| Price-to-Sales | 0.76 | 1.3 |
| Price-to-Book | 0.31 | 1.77 |
| P/E to Growth | 1.05 | 2.30 |
*Source Zachs/Morningstar
Based on these numbers, it is no surprise that the company showed up on the screener as a top value stock.
Not for those looking for stability
Cardinal just made the cut with respect to the dividend. If a stable and reliable dividend is an absolute must, then Cardinal is not for you. In the past year, it has both cut and raised the dividend.
Last December, Cardinal announced it was cutting its monthly dividend from $0.035 to $0.01 per share. This past July, it raised the dividend by $0.005 and it is now paying a dividend of $0.015 per share. This is still a 57% drop from where it was a year ago.
So how can Cardinal Energy show up as a triple-threat stock? The screener is not predicated entirely on dividend growth. Although it is a component, it also considers yield and the safety of the dividend based on the company's financial position.
This is where Cardinal Energy ranked highly. The company currently yield's a hefty 8.82% and the dividend accounts for only 61% of earnings through the first nine-months of the year. More importantly, the payout ratio as a percentage of AFFO is only 13.5% and it accounts for a reasonable 35% of free cash flow [FCF].
The December dividend cut has enabled it to focus on debt reduction, still pay out a dividend and buyback shares with FCF. In the first nine months of the year, it has repurchased 3% of shares outstanding for cancellation.
With respect to growth, Cardinal also just made the cut. The company has targeted 5-10% production growth and the expectation is for average revenue growth in the mid-teens over the next couple of years.
There are 13 analysts covering the company (7 buys and 6 holds) and they have an average one-year price target of $2.39 per share. This implies 20% upside from today's share price.
This is all assuming of course, the price of oil remains stable. Therein lies the significant risk with a company like Cardinal Energy. As a junior producer, it is more susceptible to a crash in oil prices. It also less likely to survive a prolonged bear market.
With Cardinal's inclusion, here is the revised Small Cap Triple-Threat Portfolio.
| Symbol | Cost | Market Price | Sector | Industry |
| (OTC:ADWPF) TSX:ADW.A | $13.59 | $12.39 | Consumer Defensive | Beverages - Wineries & Distilleries |
| (OTCPK:CADNF) TSX:CAS | $10.09 | $12.65 | Basic Materials | Paper & Paper Products |
| (OTCPK:EHMEF) TSX:GSY | $45.15 | $64.93 | Financial Services | Credit Services |
| (OTC:HDIUF) TSX:HDI | $12.35 | $15.31 | Industrials | Industrial Distribution |
| TSX:JWEL | $17.79 | $26.09 | Consumer Defensive | Packaged Foods |
| (NOA) TSX:NOA | $14.94 | $14.80 | Energy | Oil & Gas Equipment & Services |
| (OTC:PBKOF) TSX:PBL | $24.00 | $20.00 | Consumer Cyclical | Gambling |
| (OTCPK:RAMPF) TSX:PIF | $11.64 | $12.27 | Utilities | Independent Power Producers |
| (OTCPK:SISXF) TSX:SIS | $12.99 | $14.42 | Industrials | Diversified Industrials |
| (TOT) TSX:TOT | $9.80 | $5.59 | Energy | Oil & Gas Equipment & Services |
| (OTC:SCCAF) TSX:ZZZ | $22.20 | $20.22 | Consumer Cyclical | Specialty Retail |
| (OTC:WJXFF) TSX:WJX | $16.26 | $15.13 | Industrials | Industrial Distribution |
| TSX:TF | $9.30 | $9.77 | Financials | Consumer Financial Services |
| TSX:RAY-A | $6.29 | $6.98 | Services | Broadcasting |
| (CRLFF) TSX:CJ | $2.00 | $2.05 | Energy | Oil & Gas |
Not an endorsement
As always, investors should do their own due diligence. This is especially true of small caps. They tend to be highly volatile and in certain cases, low volume can make entering and exiting a position difficult.
The portfolio above is not an endorsement to buy any particular stock. It is intended to expose Canadian investors to lesser-known and under-covered stocks by following a strict methodology.
If you have any questions, please feel free to post in the comments.
Disclosure: I am/we are long EHMEF, SISXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.