Oil & gas stocks: one to sell; one to buy

Investor’s Digest monthly ‘Morning Call’ survey of analysts’ opinions on more than 1,000 stocks highlighted two junior energy sector stocks: one to sell and one to buy.

Oil and gas stock Bonavista Energy Corp. (TSX—BNP) saw a privately held investment holding entity build upon its existing minority stake in the company earlier this summer.

Analysts review two oil and gas stocks, both exploration and production companies. One is a buy and one is a sell.

On Aug. 6, 2019, G2S2 Capital Inc. acquired 5,600,000 common shares of BNP through the facilities of the Toronto Stock Exchange at a price of $0.50 per share.

Prior to the acquisition, G2S2, together with deemed joint actors, owned and exercised control over an aggregate of 23,849,300 common shares of Bonavista, representing 9.27 per cent of the outstanding common shares. Immediately after the acquisition, G2S2, together with deemed joint actors, owns and exercises control over 11.44 per cent of the outstanding common shares.

Earlier in August, BNP reported its financial and operating results for the three months ended June 30, 2019. For the second quarter, it reported adjusted funds flow of $40.5 million, which was ahead of plan. Meanwhile, its production for the quarter averaged 61,186 barrels of oil equivalent (BOE) per day with facility turnaround activity meaningfully curtailing production throughout the quarter.

Q2 performance fell short of consensus

Desjardins analysts Kristopher Zack and Stephen Swanson said in an Aug. 1, 2019 research note, that BNP’s second-quarter 2019 performance fell short compared to consensus, namely funds from operation per share.

“Production and capex guidance ranges for 2019 are unchanged at this point, although we expect a conservative approach operationally through the fall. While currently in compliance with all debt covenants, the company continues to negotiate for flexibility with the view of a potential breach within the next 12 months.”

The analysts also say that the company’s covenant talks are ongoing. While the process will probably take longer than anticipated because of the number of stakeholders involved in the negotiations, Messrs. Zack and Swanson say they are confident that BNP will eventually get the covenant relief it needs.

Messrs. Zack and Swanson reiterate their ‘hold’ recommendation, ‘above average’ risk rating and $0.80 target share price.

Of the seven analysts who cover Bonavista Energy, four rate it a ‘hold’ and three rate it a ‘sell’. This puts the company in the third slot on our top-10 “Time To Sell” list.

Analysts unanimously agree: Buy Seven Generations

Seven Generations Energy Ltd. (TSX—VII), the Calgary-based low-supply-cost oil and gas stock, announced that Karen Nielsen became its chief development officer in June of 2019.

The role connects the company’s subsurface, business development and capital planning with its core operations activities. Most recently, Ms. Nielsen held a key senior leadership position as senior vice president and general manager, generation, at the holding company ATCO Group Ltd.

In a July 31, 2019 news release focusing on second-quarter 2019 results, the company said that it continues to view an allocation of free cash flow toward its share buy-back program as a competitive investment opportunity. It added that the current trading value of its stock is discounted relative to the company’s internal views, and considering the potential for continuing operating and technical improvements.

Capital investment on pace with guidance

Over the second quarter of 2019, the company announced total capital investments were $311 million, with 57 percent of the 2019 capital budget invested year to date. Nest 3 Super Pad (a decentralized field conditioning plant that separates field condensate and natural gas in the Montney region) and gathering system connections were completed on time and budget such that the company is positioned for a lower proportion of infrastructure spending in the balance of the year. The company remains committed to its full-year capital guidance of $1.25 billion.

In a July 31, 2019 research note, CIBC analysts Jamie Kubik and Christopher True say that the company’s second-quarter 2019 performance demonstrates improving consistency. “While we maintain our view that VII is likely to be more of a story in the second half of 2019, the company certainly exited the first half on a high note,” say the analysts. “Operational consistency will continue to be key for VII . . . We see more upside than downside from here.”

Messrs. Kubik and True reiterate their ‘outperformer’ recommendation and $11 target share price.

This is an edited version of an article that was originally published for subscribers in the August 23, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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