Kiwetinohk may be hard to pronounce

But its value may be hard to beat

Kiwetinohk (KEC.TO) is an oddly configured oil & gas company operating in the Western Canadian Sedimentary Basin (WCSB) and benefiting from a recent acquisiton in the Montney. The company considers itself a “green” company since its operations include not only oil & gas but also natural gas and solar powered electricity generation. The company has a “woke” look and feel emphasizing diversity, inclusion and concern over “climate change”. The “woke” cachet is a bit distracting since CO2 is harmless and the so-called “transition” to so-called “renewables” a waste of time and money, but that does not detract from the value of this company.

Almost debt free, the KEC has a market capitalization of just over CAD$600 million and based on a capital expenditure budget of CAD$390 to CAD$425 million including infrastructure, the company expects to return funds flow from operations of CAD$480 to CAD$530 million in 2023. As at June 30, 2022 KEC had debt of CAD$74 million before a September acquisition of certain producing lands in the Montney for CAD$58 million so debt at present (assuming Q3 and Q4 funds from operation more or less equals normal capital outlays) is somewhere around CAD$130 million.

With an enterprise value of about CAD$750 million and expected 2023 cash flow of about CAD$500 million, KEC trades at an EV/EBITDA ratio of close to 1.5 Times making it one of the least expensive players in the WCSB. Projected output of 25,000 Boe/day is a sharp increase from current levels of about 17,000 Boe/day implying some drilling risks in the outlook.

KEC has been taking a bath on its hedge book but it may be a benefit for Q3 with the recent declines in commodity prices. The forward looking part of the hedge book is at reasonable prices although I expect hedge losses of about CAD$10 per Boe for 2023. I assume by 2024 management will have spilled enough red ink on “hedging” to give it up.

I have modeled KEC’s operations and based on crude ratios come up with a value of over CAD$40 a share for 2023, well above the current trading price of CAD$14 a share.

KEC has only 44 million shares outstanding. The per share leverage of success or failure is correspondingly high. The company does not currently pay a dividend and has no published dividend policy but plenty of policies that appeal to “woke” investors.

The lack of a dividend policy (let alone a dividend or other return of capital plan) may explain the low valuation multiple since today’s investors are demanding a cash payout from energy companies rather than a growth mentality. That makes KEC counterculture and less attractive.

Having said that, it is hard to ignore the valuation. I own 5,000 shares.