NuVista Energy Stock: Thriving in the Current Price Environment (OTCMKTS:NUVSF)

introduction

NuVista Energy (OTCPK:NUVSF) is a Canadian producer of natural gas, which accounts for just over 50% of its production profile, with oil, NGLs and condensates being its other main products. The company is taking excellent advantage of the high price of natural gas, which has allowed it to pursue aggressive growth while keeping an eye on the strength of its balance sheet.

NuVista has a primary listing on the Toronto Stock Exchange where it trades with NVA as its ticker symbol. With an average daily volume of over 1.2 million shares, listing on the Toronto Stock Exchange is clearly the best option for trading the company’s securities.

End the year on a high thanks to high natural gas prices

NuVista ended the year on a high note with its investment of nearly C$300 million in capital expenditures throughout the year. While the average production rate throughout 2021 was “a little” above 52,300 barrels of oil equivalent per day, the company’s last quarter was the best quarter ever with an average production rate of just under 61,000 barrels of oil equivalent per day. Approximately 55% of fourth quarter production was natural gas with condensate and petroleum products representing approximately 35% of the oil equivalent production rate.

The last quarter of the year was excellent in terms of revenues, revenues and adjusted funds flow thanks to the combination of a higher production rate and a higher price received for the raw materials produced by NuVista . The average price received for natural gas exceeded C$6/mmcf, which was instrumental in increasing adjusted cash flow to over C$150 million for the quarter.

In reviewing the annual results, the company reported a operating cash flow of C$339 million but this included a C$23.1 million contribution from changes in working capital position, while we should also deduct the C$3.9 million in lease payments. On an adjusted basis, operating cash flow was approximately C$311 million. Please note that this includes a realized loss on the cover pool of over C$100 million, so on an underlying basis the performance is much stronger.

Total capex was nearly C$288 million, meaning NuVista generated approximately C$24 million of free cash flow. This sounds disappointing, but bear in mind that a large part of the C$288 million in investments was related to the increase in production rate. We can also see this in the guidance for fiscal year 2022. The company plans to increase the production rate to 65-68,000 boe/day (up 9-13% from the fourth quarter production rate ) and has budgeted approximately C$300 million to achieve this goal. Since we also know that the capital efficiency is around C$9,100/boe/day, the sustaining capital expenditures are probably just under C$200 million.

Also keep in mind that operating cash flow will increase in 2022 because the average production rate will indeed be around 30% higher. Using an oil price of $85 on a WTI basis and a natural gas price of $4/mmbtu, NuVista expects to generate a C$390M FAFF meaning it’s basically targeting a full-year operating cash flow of around C$700 million. This means that net debt will likely fall below the long-term target of C$200 million (based on a maximum debt ratio of 1X the AFF at $45 WTI and $2 US gas natural). As long as net debt exceeds C$400 million, all of the free cash flow result will be used to reduce net debt. Once this target level is reached, NuVista will begin to allocate monetary resources for additional growth and redemptions.

Given that current oil and gas prices are high, NuVista should achieve this C$400 million net debt target by the end of the second quarter, but this will also depend on the timing of capital expenditures.

Current market capitalization is supported by recent reserves update

NuVista currently trades with a market cap of over C$2.3 billion, which translates to an enterprise value of approximately C$2.8 billion when considering existing net debt. The stock price has quadrupled over the last year, so it’s always important to take a look at the reserves update and the PV10 calculation of future cash flows to make sure it’s there is sufficient value to support the current valuation.

Fortunately the reserve status was quite satisfactory with a total 2P reserve of just over 567 million barrels of oil equivalent. At an average production rate of 65,000 barrels of oil equivalent per day, 2P reserves underpin a life index of over 20 years.

The company also publishes a PV10 value for NGLs and natural gas in the ground. Using the traditional discount rate of 10%, the total value of cash flows discounted by 10% but on a pre-tax basis is approximately C$4.36 billion. After deducting net debt, this means that there is approximately C$2.9 billion in PV10 value attributable to NuVista’s equity.

The table above also allows us to play with numbers. Given the current high price of natural gas, it may not be unreasonable to use a 5% lower discount rate for developed and producing reserves, which would increase the PV by more than 300 million Canadian dollars.

Keep in mind that this seems like a reasonably conservative estimate given the price of NYMEX natural gas used by independent consultants. As you can see below, the average natural gas price over the 2022-2024 period is just under $3.50 per MMbtu.

Investment thesis

Natural gas fields in Canada are doing exceptionally well these days thanks to the high price of natural gas. Companies like NuVista Energy are now taking full advantage of the increased demand for fossil fuels and it looks like this will continue for the foreseeable future. The company is also using a conservative hedge position as it has already hedged 37% of expected liquids production this year and about 46% of natural gas production (with a significantly higher share of summer production hedged at high prices). ).

I already have some natural gas exposure through my positions at Spartan Delta (OTC:DALXF) and Topaz Energy (OTCPK:TPZEF). I am not adding NuVista to my portfolio at this time, not because I dislike the company but because I already have exposure to the industry.