Best of times, worst of times I’ve been following the lively debate over the last few days, and I especially appreciate the diversity of opinion, it makes for a better board and I think all points have some merit and are worth discussing. These are my 2 cents:0
From being very comfortable and expecting a relatively rapid re-rating (“YGR is mispriced”) I’ve moderated my expectations and believe we are more or less priced correctly, at least on a EV/CF ratio which seems to be the most favored metric today. In my model, I see a 2020 corporate CF around 100 MCAD, leading to a 3X CF/EV, which is by historical measures low, but not unwarranted given the riskiness of YGR and recent disappointing operational performance. For 2020, I am using around 53 USD WTI and 1.75 AECO, and a Cheddarville TC similar to the recently reduced corporate TC from YGR (which I have argued several time were inflated and too much weighted to initial WF wells). I sincerely hope and believe they can outperform that in East Cheddar, but I don’t model that just yet. 2020 corporate production in my model is 14100 boe/d with an oil cut of 31%.
As I said in a previous post, YGR will stand or fall based on the outcome of Cheddar East (37-7ish). This is even more clear to me now based on all the land they have acquired and where they license and drill. The risk picture is very concentrated now, if for some reason these wells disappoint, in combination with weakening commodity prices YGR may end up in a situation where the bank line is reduced forcing the to take uncomfortable measures. Net debt is likely to increase by 10-15 M in Q1, but hopefully that will reverse in Q2.
That said, they have addressed one of my main concerns namely lack of tier 1 locations in a concentrated area. IF Cheddar East works out, we could be looking at 4-5 yrs concentrated drilling with very strong returns, and an ability to achieve economics of scale and efficiency gains. Mgmt have basically doubled down and it is not a company to own for the risk averse!
About Q4 production, it came in some 4.5% below my (which some claimed too low!) estimate so clearly disappointing. I have adjusted my legacy production and W.I to capture this going forward. What is more annoying and difficult to understand is why Mgmt didn’t communicate that they would miss guidance already in Q3? It was obvious they would never hit 14700 with so few (3) wells coming online in Q4. Through their lack of honest communication they have put themselves in the penalty box and they will stay there until we see outperformance again. If anyone has spoken to them on this issue, pls share.
As for Q4 numbers, my estimate is FFO (incl g&a and finance) of around 21 M. That fits well with capex (incl land) of around 22 M leading to an increase in net debt to 187 M.
On the topic of share buy backs, while I do see the accretive nature of buying back shares at this level, one has to understand that it would lead to an even more stretched balance sheet, and should production or prices go the wrong way, in hindsight it may not look like the best of ideas. I prefer them to use any free cash flow (which I don’t think they will have this year) to pay down debt, and save the buy backs when they have FCF, even if that means buying back at higher levels.
So what does the end game look like? I am pleased that they have moderated the 30k target, I never believed in it, they had neither the TC nor the inventory for it. I am currently running my model using 24 net wells per year and it flattens out as YGR says around 25 kboe/d in about 10 yrs time. FCF @55 usd WTI starts appearing in -21 and corporate declines continue to moderate, and in 22-23 it accelerates to 40-50 M per year, while still growing production at a healthy 8-9% p.a. This is the long term vision they have, transitioning into a dividend paying company with a stable and sustainable business model. I can wait 3 yrs to start collect 40c per share in dividend...
I will be watching Petroninja like a hawks for the first 3 Cheddar wells, 2 of them are close to the 4-5 wells and will hopefully come in equally strong. The next month will no doubt be critically important for YGR.
I’ll try to back up of some of my statements with charts and tables in the coming days or weeks.
Best, Darcy