Cardinal Energy Ltd.
Q3/21 – Focused on Debt Reduction
Our view: Cardinal’s quarter was generally as expected, with 2022 guidance backstopping continued balance sheet deleveraging and the likely reinstatement of a dividend in 2022. We are encouraged by the company's three-phase plan, which provides clarity around future capital allocation priorities. We reiterate our Sector Perform rating and raise our price target to $5.50 from $5.00.
Key points:
Q3/21 generally in-line. Cardinal’s Q3/21 production volumes of 19,473 boe/d were in line with RBC at 19,469 boe/d (Street: 19,835 boe/d). CFPS of $0.23 was slightly below RBC/Street estimates of $0.25/$0.27; see Exhibit 1 for key variances and additional details. Capital spending (ex-M&A) of $16.8 million compared to RBC and Street estimates of $20 million and included 5 (4 net) wells drilled.
Volumes as expected, cost-inflation weighing in. Cardinal closed its Venturion acquisition in Q3, adding 2,400 boe/d (83% liquids) of production, with current volumes at ~21,000 boe/d. Cardinal also noted continued success at Midale, with two wells drilled in Q2 injecting up to 9 mmcf/d of incremental CO2. Management highlighted inflationary pressures on well services, labor shortages, supply chain disruptions, and unplanned third-party facility outages negatively impacting operating costs.
2022 guidance places Cardinal on track to achieve debt-reduction targets.
Cardinal’s 2022 guidance incorporates $70–80 million in capex, driving 20.0–20.5 kboe/d of production volumes. The company highlighted a three-phase plan to: (1) reach $100 million in net debt by mid-2022; (2) following this, maintain a 50-50 split of FCF after ARO expenditures between dividends and debt reduction; and (3) once $50 million in net debt is reached, the company plans to increase FCF toward dividends, ARO, and ESG initiatives.
Estimate changes – adjusting for guidance, pace of deleveraging. We adjust our estimates following Q3 results and lower our production forecast by 5%/6% in 2022E/23E. Our CFPS estimates decline slightly through our forecast period as shown in Exhibit 1.
Balance sheet in good shape; modeling dividend reinstatement in 2022.
Based on our updated estimates, we expect Cardinal to reach a net cash balance by 2023, which compares to its peers at 0.4x/0.4x cash flow in 2022E/23E. On an absolute basis, we expect net debt to decline by $128/ $41 million through 2022E/23E (inclusive of dividend payments). We model a dividend reinstatement in Q2/22 at an annual rate of $0.48/share. Raising price target, maintaining Sector Perform rating. We maintain our Sector Perform rating and raise our price target to $5.50/share. Cardinal shares currently trade at 2022E/23E EV/DACF multiples of 3.1x/3.3x, a slight premium to peers at 2.4x/2.2x. We remain neutral on Cardinal as a result of limited near-term operational catalysts and its current premium valuation.