RE:Yangarra Resources: Still No Impairment Charges
Yangarra Resources: Still No Impairment Charges
Apr. 24, 2022 8:06 AM ET
Yangarra Resources Ltd. (YGRAF)8 Comments13 Likes
Summary
Reserve assumption change still did not lead to an impairment charge.
This company has so far escaped any impairment charges that have plagued the competition in 2020
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Fiscal year 2020 was profitable for the company.
The enterprise value is extremely low for a company that can grow production and reduce debt at the same time.
Margins are "sky high" and growing in the current environment.
This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research.
Yangarra Resources (OTCPK:YGRAF) management had announced earlier that the assumptions regarding reserves would change now that the company has enough history for the interval from which it produces oil and gas. Pricing is robust enough for the company to avoid an impairment charge. Most of the time these kinds of adjustments affect later years far more than they do the initial production. That is why management needed time to get the history.
Those later years are often a far smaller portion of the total reserves, and they are produced at a much lower production rate. When all that is properly discounted as a future value, the change is probably not as material as some would have thought.
Still this company manages to escape the impairment charges that seem to nag competitors on a regular basis. That is a possible sign (but not the only one) of low costs. Taking an impairment charge usually undermines a low-cost argument by management. This company is in a position to be making that low-cost argument for a long time into the future.
The nice thing about low-cost production is the ability to grow both free cash flow and production at the same time. The result of this ability is the significant debt progress shown above combined with a fast growth rate. This company will have far higher production levels to provide a larger cash flow during the next industry downturn.
The stock price has moved significantly from the date shown above. But the enterprise value is not as affected because the debt has likely declined a little. The company still has a decent value when compared to cash flow.
One of the debt reduction goals is to maintain a debt ratio below 2.0 when the next downturn hits. There is a perception that the debt ratio was too high during the last downturn in 2020 (even if the severity of another downturn is unlikely to match the one in 2020). Much of the industry is moving to lower debt levels as a result. This company included.
A company the size of this one can easily hedge to protect the cash flow guidance shown above should management believe that step is necessary. Right now, the exposure to current prices appears to be quite a benefit. So, management is unlikely to hedge at the current time any more than they have to.
The other notable topic from the slide above has to be valuation. Despite the runup in price today the valuation is absolutely absurdly cheap for a company that grows both production and cash flow. It is going to take a lot more runups to get close to a reasonable valuation. If this was a tech company the stock price would probably be over $100 per share with the characteristics shown above.
One thing I have told many readers many times is that profitable companies enjoy a sizable profit increase when selling prices rise. This company illustrates that point very well. This was one of very few companies to report a profit in any form in fiscal year 2020. The company also reported enough cash flow from operating activities to verify that the profit was real (and not aggressive but allowed accounting).
Now that cash flow becomes a cash flood. Interestingly, the Net Income Netback in fiscal year 2021 is sky high for the oil and gas industry. The average company in general reports about 5% of the sales as net income. This company is so far above that. One could easily mistake that margin for a pharmaceutical company. Since oil and gas prices have increased since year-end, that margin could be headed still higher for the current fiscal year.
The key to the profitability is production costs that would be typical of a dry gas producer (or at least a lot less liquids). Management found a very low-cost interval that produces liquids to make an extremely profitable mixture. Some would not consider this Tier 1 acreage due to the relatively high amount of natural gas production. Yet this acreage has been profitable at very low natural gas prices because that liquid production is sufficient for some decent profitability.
Investors need to keep in mind that the well cost shown above is in Canadian dollars. If that same well was costed in American dollars, it would be about 20% cheaper. That obviously makes for a very cheap well given the production curve shown above. The decline rate is very different from what the market is used to seeing with unconventional wells.
That means that the relatively high production lasts more than a year. That is far longer than many unconventional wells. More cash upfront from higher production raises the rate of return in good and bad times. Clearly, this management found a gem of an interval to produce from.
The best part is the rate of return could withstand some unfavorable news when management had finally enough history to adjust the reserve report and probably a lot of other things to match actual company experience. Now with the stronger commodity prices, the return on wells drilled is still fantastic. That rate of return still implies a good performance during inevitable cyclical downturns.
The Future
This profitable company needed to finish getting to a large enough amount of production to make it through downturns in decent shape. Clearly that will be the case for the next downturn. Many companies that began drilling after acquiring leases (and exploring the leases) were caught earlier in the transition. Fortunately, much of the industry learned from the 2015 experience so that the severe 2020 downturn did not do as much damage as feared. Now the surviving companies like this one, can grow at an accelerated rate in the current environment while decreasing the debt balance. The market is still fixated on the debt ratios in 2020 when oil prices "went through the floor". That is unlikely to happen again. Then again, a little financial conservatism does not hurt in this industry. Management has plenty of Canadian acreage to drill for at least a decade ahead. So far, the company has developed one interval. There is plenty more on the acreage to explore in the future. This company probably will not need more acreage for decades. As I have discussed in the past, this management has built and sold companies before. The experience level of management is therefore exceptional for a company of this size. When combined with the low debt and very profitable wells, the investment risk is much lower than would be the case for a typical small oil and gas company. The stock is extremely undervalued as well as shown by the relatively high cash flow for the enterprise value.][/url]