Mr. Market just gets it wrong on Bonterra Energy

No surprise (regrets to Eugene Fama) markets are inefficient

Bonterra Energy (BNE.TO) reported a solid quarter despite shutting in some 650 boe/day of production owing to gas processing plant constraints. Hitting expected results while shutting in ~5% of output is a win, but the market sold off and the shares dropped more than 5% in today’s trade.

Funds flow of $31.5 million for the quarter were up 17% over comparable period and (watch me do multiplication) imply a $126 million annual rate. At a typical multiple of 4 x EBITDA that would put an Enterprise Value on Bonterra of $504 million, subtract $173 million debt and divide the remaining $331 million by the company’s share count of 37.3 million and you get a per share value of over $8.50 a share and the market sold them down to $4.50. Go figure.

Easy to figure. There are plenty of undervalued Canadian oil & gas producers that languish at low trading prices until someone larger decides its cheaper to buy reserves than drill, as was the case with Crew Energy which was just taken out by Tourmaline Oil at a 70% premium to market. Bonterra will likely trade sideways for a considerable period of time, and investors should cheer that outcome since they can add to holdings at deeply discounted prices.

What will trigger a re-rating?

Other than another company bidding (like Obsidian did last year and failed to win BNE) the trigger will be a return to dividends. Bonterra can maintain and even expand production steadily with a $90 million capital budget, and with cash flow for the last quarter running at $126 million could elect to pay out a dividend of over $1 a share and not compromise its drilling program. At today’s prices, that would be a yield of more than 20%.

I don’t expect Bonterra to pay any dividends until its debt is well down from the current $173 million, likely by the end of 2025 if commodity prices remain at today’s level. I have ignored the 650 boe/day of shut in output. At a netback at Bonterra’s average of about $24 per boe, that shut in production should come onstream and add at annual rate 650 x 365 x 24 = $5.8 million to annual cash flow, and accelerate debt repayment. With an average interest rate of close to 10%, cutting debt by $50 million (which I estimate Bonterra will do by year end) adds another $5 million of margin.

My view, for what it is worth, is that the current price of Bonterra shares will go down in history as one of the great buying opportunities for energy investors in smaller capitalization companies, and I expect within a couple of years my 60,000 Bonterra shares will enjoy at least $60,000 a year of dividend income. For an old, retired curmudgeon like me, that is worth the wait.