We drilled down and identified four Canadian oil and gas juniors that are prime acquisition targets due to high free-cash-flow yields in a sliding market
SmallCapPower | October 26, 2018: The oil and gas landscape in Canada could dramatically change over the next few months. Canadian crude oil prices continue to drop, West Canadian Select is trading its lowest point since February 2016 with a price of US$17.82 per barrel on Thursday. The decline has significantly affected earnings of oil & gas producers leading to falling share prices across the sector. For reference, the S&P/TSX Energy Index fell 19.3% in the past three months. However, some producers are utilizing the depressed market as an opportunity for M&A activity. Recall, in September, Husky Energy (TSX:HSE) announced its takeover of MEG Energy Corp. (TSX:MEG) in a transaction valued at $6.4 billion. Today, we have identified four Canadian oil and gas juniors that look like prime takeover targets. All have seen their share price decline in the past three months but reported positive free-cash-flow yields in their most recent quarterly financial results.
Obsidian Energy Ltd. (TSX:OBE) – $1.01
Oil & Gas Exploration and Production
Obsidian Energy is a Canada-based oil producer operating in Alberta. The Company operates ~1600 sections over four areas and is producing 30,000 boe/d. In October, the Company announced an update on its 2018 drilling program. Three wells drilled at Crimson Lake are expected to be completed and begin production by mid-November. The Company expects that of the 15 wells under development for 2018, five will be producing by the end of the year while the remaining 10 will be operational by Q1/2019.
- Market Cap: $512.3 Million
- 1 Month Total Return: -22.3%
- 3 Month Total Return: -26.8%
- Levered Free Cash Flow (Last Quarter): $64.6 Million
- Free Cash Flow Yield: 12.6%
Freehold Royalties Ltd. (TSX:FRU) – $9.94
Oil & Gas Exploration and Production
Freehold Royalties is a Canadian company focused primarily on acquiring and managing oil and natural gas royalties in Western Canada. The Company’s total land holdings encompass approximately 3.7 million gross acres, over 90% of which are royalties. Of this, its mineral title lands (including royalty assumption lands), cover approximately 750,000 acres. The Company also has interests in over 42,000 wells (of which over 40,000 are royalty wells, including over 1800 unitized wells). The Company has approximately 300,000 gross undeveloped acres. In addition, it has gross overriding royalty interests in over 2.5 million acres.
- Market Cap: $1,176.4 Million
- 1 Month Total Return: -12.8%
- 3 Month Total Return: -18.3%
- Levered Free Cash Flow (Last Quarter): $23.1 Million
- Free Cash Flow Yield: 2.0%
Surge Energy Inc. (TSX:SGY) – $2.04
Oil & Gas Exploration and Production
Surge Energy is an oil-focused exploration and production company based in Canada. The Company has more than 700 drilling locations spread over Western Canada. Surge has three major operational zones called Western Alberta, South Eastern Alberta and Shaunavon, which expect to produce 16,580 boe/d in 2018. On October 25, 2018, Surge announced that it had completed the acquisition of Mount Bastion Oil and Gas Corp (MBOG), a deal that will add over 600 million barrels of net internally estimated light original oil.
- Market Cap: $476.6 Million
- 1 Month Total Return: -23.9%
- 3 Month Total Return: -16.7%
- Levered Free Cash Flow (Last Quarter): $11.7 Million
- Free Cash Flow Yield: 2.5%
Tamarack Valley Energy Ltd. (TSX:TVE) – $3.62
Oil & Gas Exploration and Production
Tamarack Valley Energy is a Canada-based oil and gas producer operating in Alberta and Saskatchewan. The Company’s flagship operation, the Viking project, is a heavy-oil field located east of Edmonton with a daily production of 12,163 boed. On September 20, 2018, the Company announced that it had increased its Q3/18 production guidance to an average of 24,700 boe/d after better-than-expected performance from its Alberta Viking drilling program. Tamarack was recently added to the TSX Composite Index on September 24, 2018.
- Market Cap: $821.8 Million
- 1 Month Total Return: -28.3%
- 3 Month Total Return: -20.8%
- Levered Free Cash Flow (Last Quarter): $ 9.9 Million
- Free Cash Flow Yield: 1.2%
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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