I have been keeping tabs on Bonterra Energy (OTCPK:BNEFF) for most of the past year as I have enjoyed how high oil and gas prices have allowed the company to quickly reduce its gross and net debt.. This will obviously also have a positive impact on interest expense and will play an important role in mitigating the impact of lower oil and gas prices.
Bonterra’s most liquid listing is the TSX listing where it trades with BNE as its ticker symbol. The average daily volume on the TSX is around 150,000 shares per day, clearly making it the most liquid listing for this company. The current market cap hasn’t changed much from July, as the company’s equity is still valued at around C$300 million.
Bonterra’s half-year result bodes well for the full year
In a July article, I argued that the sale of Bonterra in the second quarter, which saw the share price drop from over C$12 to around C$8, was undeserved because the company took all the right steps.
While the second quarter was obviously great, oil and gas prices pulled back from their highs, so it might be best to take a look at Bonterra’s first half (rather than the second quarter only) to avoid getting carried away with what could very well be one of the best quarters on record.
The average oil price throughout the first half was slightly lower at C$119 per barrel, while NGL prices also remained high: Bonterra received nearly C$71 per barrel of NGL, nearly double the 35 C$.59 received in the first half of last year. And of course, the price of natural gas was also still very high due to the average price of CA$6.76 in the second quarter of the year. Admittedly, using first half results is still a bullish approach given the current oil and natural gas price situation, but at least it’s more realistic than just focusing on the second quarter.
With an average production rate of nearly 14,000 barrels of oil equivalent per day and an average realized price of CA$83.3 per barrel of oil equivalent, net cash income increased to nearly CA$44/ barrel. This is despite the higher loss on hedges and the higher royalty payment per barrel of oil equivalent due to the scaling nature of the royalty structure.
Reported net income was C$164 million in the first half, which already includes royalty payments as well as a C$18 million loss on hedges. With total operating expenses of just under C$105M (about 40% of which is represented by non-cash amortization expense), pre-tax profit was a very pleasant C$59M, which resulted in a net profit of C$44.1 million. .
Based on the current number of shares, EPS was C$1.24 in the first half and, as you can imagine, it was primarily the second quarter that drove net income with an EPS of 0 CA$.93. That being said, the majority of hedging losses were incurred in the first quarter, making the second quarter result disproportionately better than the first half.
Reported operating cash flow was C$99.2 million, but this includes a working capital investment of C$6.5 million. Thus, on an adjusted basis, operating cash flow was C$105 million. This includes approximately C$13 million of realized hedging losses, as approximately C$5.4 million of unrealized losses were added back to cash flow income. And seeing how oil and gas prices have turned lower, those unrealized losses may actually be converted into realized gains before too long.
Total capex was only C$46 million, resulting in an underlying free cash flow of nearly C$60 million, which includes nearly C$13 million of realized hedging losses .
The cash flow statement above shows that Bonterra continues to rapidly reduce its net debt by paying off approximately C$51.5 million of debt during the first half. This reduces the net debt to approximately C$207M (Bonterra’s corporate presentation mentions C$211M but the sum of C$111.5M in bank debt, C$47.3M in subordinated debt and C$48.5M C$ in subordinated debentures is approximately C$207 million).
A look at the directions for the full year
Bonterra did not further increase its annual investments from C$70 million to C$75 million after the initial inflation-related increase, which means that around 65% of the annual investments have already been spent in the first half of the year. This means that despite lower oil and gas prices in the second half of the year, free cash flow should remain quite strong, as lower operating cash flow will be mitigated by a lower capital requirement. .
This means that Bonterra’s official forecast to generate C$128 million in free cash flow still stands, although perhaps we should be a little more cautious. An average WTI oil price will likely result in full year free cash flow of C$120 million or C$3.31 per share.
Using an average WTI oil price of US$80 for next year and applying an AECO natural gas price of CA$4, I project a free cash flow result of about CA$2.5/share assuming the company can continue to use some of the C$261 M in tax pools. As the hedging portfolio unfolds slowly, I do not anticipate any sudden fluctuations in hedging losses or gains.
It looks like Bonterra has its priorities in quickly reducing its net debt. I think the company has a good chance of ending this year with a net debt level of around C$150-160 million (depending on how working capital needs fluctuate in the second half) and that will help Surely Bonterra will refinance its bank facility (the company has already accepted four monthly reductions of C$10 million per month) and this may give the market more confidence in Bonterra’s ability to execute on its plans.
I still don’t have a long position in Bonterra Energy, but the value proposition is getting more tempting by the day. Although the market cap hasn’t budged at all since July, the company has likely generated an additional C$30 million in free cash flow since my previous article was published.