Earnings season often exposes risk and opportunity in energy names

Pay attention to improving balance sheets

Energy names I follow start reporting next week. The reporting calendar includes:

July 26 - WCP CPG GXE
July 27 - AAV BTE CJ MEG SGY CVE
August 1 - ARX SU TOU
August 2 - CNQ FRU OBE
August 9 - BNE NVA PEY RBY PNE SDE

I am most interested in the results for Bonterra ($BNE) and Spartan Delta ($SDE). Bonterra should turn in some impressive progress in reducing debt paving the way for dividends. Edmonton par oil averaged $94.80 per barrel in Q2 2023, Condensate averaged $93 per barrel and natural gas (AECO only) was $2.43 a gigajoule although Bonterra has hedged some of its exposure at higher prices. When I put those data into my model for Bonterra, I see Bonterra’s realized price per BOE in the $62 range and field level cash flow running at annual rate of just over $170 million. For the quarter, I expect Bonterra to report EBITDA of $40 million, capital expenditures in the $20 million range, and a $10 million reduction in debt (presuming the capital expenditure estimate is in the ballpark) to about $170 million. Given oil prices remain relatively firm and Bonterra operating costs are well-controlled, I anticipate year end debt to come in about $140 million, less than cash flow, and free cash flow for the year to be in the $50 million range. If the trend persists, Bonterra will eliminate virtually all debt within three years and be in a position to resume payment of dividends. With only 37 million shares outstanding, a dividend rate of $1.00 a share is supportable. I own 55,000 shares.

Spartan Delta ($SDE) recently completed its major restructuring paying $9.60 per share in dividends and return of capital while spinning off Logan Energy (one Logan share $LGN for every $SDE share) with the newly minted Logan shares (which were distributed at $0.35 per share) already trading at ~$0.90 per share. What is left in Spartan Delta is the Deep Basin assets purchased out of the bankruptcy of Bellatrix a couple of years ago and those assets are comparable to the similar landholdings of Birchcliff Energy ($BIR) although less developed with production about 40,000 Boe/day versus double that for Birchcliff. Given $BIR has a market value of ~$2 billion, I value the slimmed down $SDE at $1 billion or about $6.00 a share, more or less. Spartan has little debt and highly productive assets and I expect to see the report shine some light on the outlook for the company pointing to steady growth in production and cash flows and possibly a nominal dividend. I hold 65,000 shares.

Both Spartan Delta and Bonterra Energy are core holdings for me. Between them and my 140,000 shares of Birchcliff Energy, I expect to enjoy somewhere between $120,000 and $150,000 a year of dividends with that stream of income likely to grow or fall with commodity prices with the trend upwards over the cycles.

Whitecap and Crescent Point will also be interesting reports. Both companies have excellent assets, are integrating major acquisitions, and are in the “debt reduction” mode while paying reasonable dividends. Both seem modestly undervalued to me.

Finally, I see Baytex Energy making progress in cleaning up its balance sheet after its major acquisition of Ranger Energy and the quarter’s report will provide some insight into what I see as one of the best long term plays for oil bulls in the oil patch. While the Ranger assets will take center stage, I think disclosure of continued progress in developing Clearwater assets will make interesting reading and give some insight into the outlook for Tamarack Valley (TVE) and Rubellite (RBY) who are neighbours in that exciting play.

I expect few surprises from the rest of the field.