Oil & Gas Analysis January 2013 Update

Capital expenditures & production guidance for 2013 are making their way gradually into OGA for companies in the coverage universe. The budget announcements are typically released between December and January.

For dividend paying companies, the annual average production & capex figures are instrumental for projecting a company’s ability of supporting its dividend. While guidance usually comes with a commodity price deck assumption, there are no guarantees these prices will materialize in 2013.

You will notice that for the stocks tracked by OGA, the realized price of oil & gas are largely based on the last reported figures in Q3. The realized price for each commodity varies from one company to another depending on hedges and the quality of the product (light/medium/heavy oil, heat content in natural gas etc.) This explains why forward strip prices are not used by default.

When comparing oil and gas stocks with peers, the best way to account for changes in commodity pricing is by using increments/decrements in price. For example, what happens if these companies realize $0.50 more per mcf in 2013?  This is a more accurate method for comparing the impact of an increase in the price of natural gas rather than just slapping $3.00/mcf for all.

Since all the columns can be reordered, investors can identify the impact of increasing/decreasing commodity price on CFPS, P/CFPS and D/CF metrics.

Pricing in an increase of $0.50/mcf in natural gas prices.

It’s very important to remember that when modelling revenue forecasts, you are dealing with ballpark numbers just like E&P companies as the only certainty in this exercise is the uncertainty of future commodity prices. However, these financial projections are extremely important for any investor when it comes to monitoring balance sheet health particularly for junior and intermediate dividend paying stocks.

production guidance indicator

For individual stock analysis there is a new indicator that shows up next to the production figure:

  • 2013AA: indicates the Annual Average production guidance for 2013
  • 2013A: Indicates the Actual production as of the last quarter/latest presentation/last news release.
  • 2013E: Indicates the year end Exit production guidance for 2013.

These codes are also accessible in peer comparison, all you need to do is hover your mouse over the production figures and a small tooltip will appear with the info inside for each stock.

production guidance tool tip

This feature provides you with a quick overview of the production being compared. Usually, exit rate guidance is not that far from the annual average guidance as the volumes are reached with flush production at the end of the year.  For example Bellatrix Exploration guided for 19,000-19,500 boed for its 2012 exit and is guiding for 20,000-21,000 boed in annual average production for 2013.

During this month as more and more companies release their budgets, those that are included in the coverage universe will be updated. Finally, for the non-dividend payers, the capex figure is now part of the stock analysis page (it was only available for the dividend payers). This allows you to compare the projected revenue with the planned capex and evaluate the prospects of fully funding growth from internally generated cash flow.

If you have any questions or concerns, please do not hesitate to contact us.

Stock Analysis: Eagle Energy Trust 2013 Outlook

The OGA Stock Analysis feature is a very powerful tool available to investors. At first sight, a stock’s balance sheet might overwhelm you with numbers. However, this case study will show you how you can use this feature to your advantage using a dividend paying energy company. Eagle Energy Trust (TSX-EGL.UN) was of the first of the so called “cross border trusts”, a new breed of energy income trusts with assets exclusively in the US.  Last week, Eagle released a 2013 capital budget of $US 24.0 million with the following guidance:

  • Average working interest production of 3,000 boe/d comprised of 88% oil, 8% NGLs and 4% gas.
  • Operating costs expected to average in the range of $12.00 to $14.00 per boe.
  • Funds flow from operations of approximately $41.0 million using the following assumptions:
    • pricing at $US 90.00 per barrel WTI oil, $US 2.90 per mcf NYMEX gas and $US 39.60 per barrel NGLs (NGLs price is calculated as 44% of the WTI price);
  • A basic payout ratio at 77% (distribution per share dividend by cash flow per share.)
  • A sustainability ratio at 136% (distribution + capital expenditures)/funds flow. This ratio is very important, it is a visual indicator of a company’s ability to fund its distributions from cash flow and develop its asset base at the same time.
  • A DCF debt to cash flow ratio of 0.8. The DCF is calculated by dividing a company’s total debt by its cash flow. The ratio indicates a company’s ability to satisfy its debts.

Finally, Eagle reported a 65% DRIP participation rate. This means that 65% of the cash it pays out to investors is recycled back into the company in exchange of new shares. Before we proceed, this case study requires you to have an account on this site. If you do not have one, please take a minute to sign up here : Now let’s open Eagle Energy Trust’s Stock Analysis sheet.  From the main stock list, click the Dividend Payers checkbox and select Junior from the Profile drop down list (please see image below)

selecting eagle energy trust from the list

As you can see from the screenshot above, Eagle Energy is the 4 th item in the list. Click on the Stock Analysis link and an overlay window will open. First, let’s confirm that our financial model reflects the company’s guidance. If you scroll down to the Basic Payout Ratio and Total Payout Ratio sections you will see the 77% and 136% figures right there. The funds flow of $40.9 million is right in line with company guidance of $41 million.

eagle energy trust 2013 payout ratios

The 77% basic payout ratio figure is shown in green because what the company is paying out per share is less than what it is bringing in. However, 77% is a bit high compared to the 50%-60% typically targeted by energy companies. The 77% percent does not account for the money the company has to spend in order to maintain/grow production. This is where the 136% figure comes in, the figure is in red because the company is losing $14.6 million in order to pay its dividend and maintain/grow production at the same time. (The 136% and the $14.6 million can be seen printed in red in the image above)

Since 65% percent of investors are recycling their dividend into shares (DRIP figure as per the company), out of the $31.5 million paid in dividends more than $20 million dollars are returned to the company. This means that in 2013, the company will theoretically be able to pay down its surplus of $5 million dollars on debt thanks to DRIP investors (DRIP Dividend Reinvestment Plan). This brings us to the amount of debt the company is carrying, $37 million as of 2012 exit according to company guidance. If we reduce this number to $32 million based on the surplus we see above, the debt to cash flow ratio drops to 0.8x which falls again in line with company guidance.

improving debt to cash flow ratio in 2013 - in theory at least

The figure above shows the old and new figures for DCF and EV/BOEPD.  The DCF figure is excellent compared to peers as it is below 1.0x cash flow. At first glance, the visual investment case for EGL looks good; the balance sheet is in good shape with no apparent danger of a dividend cut. However, since this is based on company guidance and DRIP, there's always a possibility a few things can go wrong. This is where you come in; your investment decision is based on your own commodity price outlook, comfort level with risk and your trust in EGL's guidance.

Obviously, there’s no free lunch when investing and the 13% yield you currently get reflects several risk factors (as well as institutional tax loss selling per the company's news release). Investing in dividend paying energy stocks requires you to keep an eye on commodity pricing as this is the biggest risk factor of all. Since production is 88% weighted to oil, if the realized price of oil drops to $80 would you still want to be holding this stock? Is the dividend still sustainable? It takes a few seconds to get the answer. Just enter 80 in the realized price of oil input box and click on recalculate to refresh the whole scenario for 2013.

Realizing $80 per barrel of oil hurts!

The first thing you will notice is that the operating profit per barrel drops by more than $6 which brings the annual funds flow down by $7 million. The sustainability ratio is a disaster at 164% and despite the DRIP money; the company is losing more than $1 million which means the debt is increasing because the company has to borrow to pay its dividend. Obviously, in this scenario, the dividend would not be sustainable and the market  prices in a cut taking the share price lower. Please take note that a realized price of oil at $80 means WTI oil is below $80 because the company realized a slight premium to WTI on its sales. (The market is forward looking, as such it might ignore the company hedged 40% of is production in 2013 between $87 and $108). Can we estimate the dividend cut? Of course we can. Assuming the company would want to keep similar payout ratios, enter $0.72 in the dividend per share box and recalculate.

hypothetical dividend cut

Reduced cash flow results in a reduced dividend with similar sustainability ratio. It is easy to run hypothetical scenarios on any dividend paying stock. This helps you identify what you are comfortable with in terms of payout ratios and dividend cut/increase expectations. What if 6 months into 2013, the company suddenly reports it is missing guidance this year as a result of modified drilling or completion practices? It takes you a few seconds to enter the lower production volume and recalculate. You will be in a position to take a buy/keep/sell decision in a matter of seconds based on the snapshot you generated. What is the impact of volatility in commodity prices for oil or gas? Set your projections and calculate. You will be able to identify a mental floor in commodity pricing as a stop loss for holding this energy stock. The stock analysis tool allows you to generate a forward looking snapshot of a company’s financial health upon which you choose to act buy/sell/short/keep .  Finally, this is the only tool that gives you the power to make an investment decision in a matter of seconds following a material news release.

Please do not hesitate to share your feedback or ask your questions by leaving a comment or through the contact us form .

Oil & Gas Analysis Coverage Universe

Oil & Gas Analysis currently maintains a coverage universe of more than 50 oil and gas stocks for the purpose of identifying quality investment opportunities.

The stocks are domestic Junior and Intermediate E&P companies operating in the Western Canadian Sedimentary Basin. Canadian based international companies have not been included because the geopolticial risks differ from one region to another. This means the market valuation for the plays in New Zealand differs from the valuation of those operating in Argentina for example. We would not have enough participants for an accurate peer comparison on a country basis. This is why it is limited to companies operating in Canada.

Junior & Intermediate producers are very sensitive to the volatility in commodity prices. This is where the high dividend paying companies and the high growth exploration companies reside. We believe this is where the money is to be made and not in the more established senior producers.

Our coverage universe includes the following stocks:


Please do not hesitate to contact us if you have any questions or concerns.

The OGA Team

Welcome to Oil & Gas Analysis

Investors! You can now compare financial and valuation data on the leading junior and intermediate oil producers in Canada.  Which company has the highest cash flow but lowest valuation?  Play with data for FREE on this new BETA software I’ve created—and give me feedback.

Hi, my name is Michel Massaad, editor of www.BeatingTheIndex.com .  I research and invest full time in the junior and intermediate oil and gas sector.  I do my own research; I don’t read many analyst reports from brokerage firms.

But I read enough to know who the Top 50 junior and intermediate players are on the Toronto Stock Exchange.   And I input the most up to date financial data from them into my custom software so YOU can compare these companies to help you decide which stocks make the best investments for you.

This is just a BETA software—there are a lot of things I want to add for you—but I need some market feedback before going any further.

Keith Schaefer of the Oil and Gas Investments Bulletin is helping me market the product—we are both about empowering retail investors.  We’re offering a FREE, one year subscription to his service for the two investors who give us the most valuable feedback on how to improve The Oil and Gas Stocks Analysis software.

As background, I wanted to compare a stock to its peers based on several valuation metrics like EV/BOED, P/CF and CFPS but it was very time consuming. Market volatility forced me to enter stock prices manually every-time

I wanted to get an updated picture on valuations.

My evolving research skills required a dynamic system that went beyond Excel.

So I came up with a solution to my problem by combining my software background with my passion for investing in the oil and gas sector. I have worked in building software for years and that helped me design a powerful solution that would streamline my research efforts.

First, I really wanted to have the whole oil and gas sector under my fingertips. So I developed a stock screener that allows me to display the whole sector in one list or break it down per category. Stocks are distributed into 5 categories: Junior E&Ps, Intermediate E&Ps, Senior E&Ps, Oilfield Services and Pipelines.

The screener allows me to identify who the top movers were at any time during the day. For example, I can display the top 5 market gainers and losers in the junior E&P category at any time. If I do not wish to look at penny stocks, I can filter the list by price to show stocks above $1 for example. This allows me to spot stocks going higher or lower. It the move is based on a news release, I can quickly assess the news and decide for myself if the stock has more running room left or if the market simply overreacted providing a cheap entry point.

The screener also helps me identify who the best year-to-date performers are. This shows me at all times which stocks the market is rewarding or abandoning in the sector or by category. Last but not least, the screener allows me to pull up all the dividend payers in the sector.

I have the ability to customize my view according to the price range and category of interest. Looking at the sector from the angle of my choice helps me spot momentum, trends or simply get a feel on market sentiment in general.

Now that I had all the stocks in the sector accessible in one spot, I began developing my research modules. Among the 400 plus stocks in the list, there are only a few worth following and investing in. Right now, there are more than 50 stocks covered- that means their balance sheet has been virtualized and is updated on a quarterly basis.

Editing a stock’s balance sheet is very powerful as it provides multiple metrics widely used for valuation purposes. One cannot evaluate a stock based only on 1 piece of data such as EV/BOED. I learned that you need to look at a whole set of data including EV/BOED, P/CF, CFPS, Netbacks and others to read into the market’s thoughts. A stock might be cheap using EV/BOED but very expensive on a CFPS multiple basis or cheap on EV/BOED but has the highest EV/2P reserves.

comparing TriOil Resources to its peers (click to enlarge)

Herein lies the power of Oil and Gas Analysis software, you get to read what the market is thinking by displaying the full set of valuation data. Most importantly, you can compare this data to peers with equivalent production mix.

Comparing a stock to its peers allows you to visualize where its valuation stands relative to the peer average. It also helps you project the upside in capital gains if you believe the market will reprice your stock according to the average combination of metrics.

This brings us back to the balance sheet edition. This tool allows you set your own commodity prices according to your expectations. Early in 2012, when it was clear the winter heating season was lost; analysts were still using $3.75/mcf in their natural gas price estimates for the year. Yet, natural gas prices were hitting lower lows one day after another and ended up averaging about $2.15./mcf for the year.

This feature allows you to take commodity price projections into your own hands. Where you think oil or gas prices will be in the coming months can quickly translate into target price projections based on a company’s cash flow.

This powerful feature also allows you to confirm the sustainability of a company’s distribution. Dividend paying companies have to generate enough cash flow to support maintaining production levels and paying out the distribution. When cash flow keeps dropping as a result of lower realized commodity pricing something has to give, either the capital spending is cut or the distribution is slashed. In both cases, the market starts to price the risk of a cut in earnest.

A clearly unsustainable dividend, but what if the capex is cut?

Retail investors are usually the last to realize why a dividend paying stock took a beating. However, that should no longer be the case because now you can run multiple scenarios to stress-test a company’s distribution. You will finally be able to see who is borrowing to pay his dividend and who is not. That allows you to choose a dividend paying company carrying a debt level you are comfortable with.

If you’re a novice investor, this is your chance to learn all about investing in the oil and gas sector. The help section is built with you in mind and the team is accessible at all times by email to answer your questions.

If you’re an experienced investor, I think this will complement your strategy by increasing your efficiency in spotting opportunities and evaluating companies based on multiple data points.

The Oil and Gas Analysis site is the only tool you need to make faster and smarter investment decisions for better profits in oil and gas stocks. Sign up here and see for yourself how easy and powerful this software is. We would really appreciate your feedback. Tell us what you think or how it’s helping you make or save money and get a free 2 months subscription in return upon official launch.