Crew's release yesterday after hours is very optomistic about the immediate future. Clearly the 2-year plan to refill existing gas plants, which are a fixed cost regardless of volumes, is on or ahead of schedule given they exceeded the 4th Q prduction estimate (29,142 boe/d vs. top-end of range, 28-29,000 boe/d). They reiterated their earlier cash flow estimates of $190-210m ($1.25-1.38/sh.), which on today's share price computes a P:CF multiple of 2.77-3.05x. This is still modest given the positive prosects for the NG business in Canada given current market dynamics and the approaching Canada LNG project, now 60% completed.
They are frontloading 2022 capex (60% in Q1) into the winter drilling season, so free cash debt paydown will proceed in earnest during spring break-up which makes field work very difficult. Spring break-up (starting in about 3 or 4 weeks in NEBC) effectively forces free cash upwards strongly till summer drilling (spring break-up is a mud bog) commences.
However, their forecast is brazen sandbagging. All they could do to avoid blushing was to state that 2022 "at current forward strip commodity prices, Free AFF14 is expected to be at the high end or above our guidance range of $95 to $130 million" (and it will definitely, without any doubt, be above, way above!!).
Just annualzing Q4 begets $190m cash flow, the bottom number of the forecast range, so we can see that that isn't going to be in play, at all. Why do I say this? Look no further than the assumptions for commodity prices. WTI of $65/b (which is relevant for the 20-25% of oil, condensate and NG liquids priced off WTI). Even if we assume "only" $80/b (assuming Ukraine magically resolves itself amicably and Russia returns to world market as an unconstrained supplier), it adds $0.15/sh. to cash flow and free cash. NG, almost 80% of production, is fed into the cashnflow model with an assumed AECO $3.50CDN/GJ and $4US/mmbtu Nymex. Q4 combined gas pricing (both delivery points) was $5.24/mcf. I doubt with all that's happening internationally, partially fed through by LNG arbitrage combined with competition from utilities looking to refill moderately depleted North American inventories, that we'll see a 2022 average AECO price below $4.50/mcf (within the range of the usual seasonal gyrations, yesterday it was $5.40 in a gradual but consistent rising trend).
The sensitivity chart shows the impact of $0.10 delta for both delivery points as summing to $0.02/sh for each unit of +/-$0.10. If AECO averages $4.50 CDN in 2022, that's +$0.20 cfps. If NYMEX averages $4.50 US, that's another +$0.05 cfps. Net/net, we could reasonably see cfps in 2022 as $1.31 (ave. of sandbag range) + $0.25 = $1.56 cfps. And free cash more like $180m.
Debt problem! I think it fair to question, what debt problem? They just forecast D:CF falling from 2.6x to 1.9x by year-end. With much higher free cash (removing debt $ for $ in the numerator) and a bigger denominator in the calculation, I think it more likely the debt burden will fall to as low as .8-1.1x by year-end (guesstimate: $210m debt/$240-250m cf).
So, this report appears way beyond normal forecast conservatism. Rather than a price to cfps multiple of 2.77-3.05x, it appears we're sporting a current 2.25-2.5x P:CF multiple. Simply ridiculous for a financially sound (going to fortress balance sheet in 12-14 months), rapidly growing entity with a foundational, concentrated, high reserve land base sitting literally on the gathering point for Canada LNG.
Last data point. 1P NAV at 10% discount is over $5/sh., 2P is over $11. I don't expect to trade anywhere near 2P/sh., but $3.85 current price leaves a wide gap to move towards.
Regards,
Naamkat