NuVista's Lenders Offer The Company A Helping Hand

| About: NuVista Energy (NUVSF)

Summary

NuVista definitely won't be free cash flow positive this year, as even at $51 oil its OpCF won't cover the capex.

The company's hedge book is a positive feature and will reduce the pressure on the financial statements.

But you shouldn't expect any miracles, as it's unlikely NuVista will be free cash flow positive as long as oil stays below $55/barrel.

Fortunately, the company's lenders have been helpful as NuVista's credit facility has been reconfirmed, allowing NVA to cover the shortfall with debt.

Oil seems to be bottoming out now (although I'm not fully convinced this indeed is the bottom), so I've been looking at some interesting oil and gas companies recently. I came across NuVista Energy (OTC:NUVSF), which focuses on its Alberta oil projects. I would like to find out how the company is doing, and coping with the low oil prices.

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NuVista is a Canadian company, and it might be a much better idea to trade in its shares on the Toronto Stock Exchange (NVA is the symbol). The average daily volume is 540,000 shares, and that's indeed (much) more liquid than the OTC listing.

Recent Released Quarter Was Good, but More Will Be Needed

NuVista isn't really a small producer, and in the third quarter of 2015, the company produced in excess of 21,000 barrels of oil per day (which increased to 23,400 barrels in Q4). That was right in the middle of the production guidance it had released to the market earlier on. That's not a bad achievement, considering the wide-spread pipeline outages in Alberta, which had an impact of almost 1,600 barrels of oil per day.

Despite these outages, NuVista was pretty much on track to deliver on all fronts. The total revenue of C$55M ($39M) was "okay-ish" when you take the lower-than-expected oil production into consideration. Fortunately, NuVista was also able to add quite a few (realized and unrealized) gains on its hedging portfolio to the income statement. If you take these positions into consideration, the total revenue was almost C$69M ($49M).

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Source: Financial statements.

After deducting all expenses -- including depreciation/depletion/impairment (DDI) charges -- the company reported a pre-tax loss of C$65M ($46M) and a net loss of C$75M ($54M). Unfortunately, the company hasn't broken down the DDI in subdivisions. But according to the notes associated with the financial statements, approximately C$55M ($39M) of the C$91M ($65M) was caused by an impairment charge. And, of course, none of the DDI charges are cash charges, so the cash flow statements of NuVista Energy should be looking a lot better than the income statements.

Indeed, even if you exclude the changes in the company's working capital, NuVista generated an operating cash flow of approximately C$22M ($16M) in the third quarter of 2015. This wasn't enough to cover the C$57M ($40M) in capital expenditures (as the company was "betting" quite heavily on continuing its exploration activities), but there will be an improvement in 2016.

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Source: Financial statements.

Looking at the results if the first nine months of 2015, the adjusted operating cash flow (adjusted for changes in NuVista's working capital position) was C$79M ($56M). But as NuVista spent C$220M ($156M) in capital expenditures and exploration expenses, the company was very clearly free cash flow negative in 9M 2015. That's not really a sustainable business model.

2016 Capex Slashed, Which Will Prove to Be a Good Move

For a lot of oil and gas companies, 2016 will be centered not only on protecting their balance sheets, but also protecting the existence of these companies in their current form. Some companies with high decline rates and high debt levels are pretty much toast, but NuVista actually has a chance to weather this storm if it spends its cash wisely.

Source: Company presentation.

Fortunately, the company also has some hedges in place as it has hedged 3,200 barrels per day in Q1, 2,500 barrels/day in Q3 and 2,200 barrels per day in H2 2016 at an average price of approximately C$84/barrel (which turns out to be approximately US$60/barrel). So the hedge book will continue to have a positive effect on NuVista's cash flow statements. That will be really helpful to cover the ongoing capital expenditures.

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Source: Company presentation.

Besides having an "okay-ish" hedge book, NuVista Energy is also planning to slash its capital expenditures. While the company will spend in excess of C$280M ($199M) on exploration and capital expenditures in 2015, this amount will drop to C$140-$160M (midpoint: US$106M) in 2016. This will reduce the pressure on the company's balance sheet and financial statements.

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Source: Company presentation.

Will this cost reduction be sufficient to get NuVista free cash flow positive? No, that's unlikely. Even though the production rate is expected to increase to an average of 24,500-26,000 boe/day, the expected operating cash flow in 2016 will be "just" C$110-$120M (midpoint: US$82M), based on a WTI oil price of $51/barrel. As the price of oil is currently trading much lower, it's unlikely we'll see an average WTI price of $51/barrel. Investors should be prepared to see operating cash flow come in below C$100M (US$71M) despite the very weak Canadian dollar, which reduces the pressure on the cash flows by a little bit.

Investment Thesis

NuVista Energy has it all figured out, and the company would be a very interesting asset to own if oil was trading at $60+. However, that's not the case and NuVista will have to try to find a happy medium to make sure it's not adding too much stress to its balance sheet. Fortunately, the company's debt position is still acceptable (at C$172M), so I wouldn't expect the company to have a hard time increasing the amount of debt as the majority of its assets have been financed with equity.

I think the future will prove this was the smartest thing to do, and unlike other oil companies -- such as Pengrowth (NYSE:PGH) -- NuVista doesn't feel the breath of creditors on the back of its neck. In fact, despite the low commodity prices, its lenders have reconfirmed the credit facility, allowing NuVista to draw down more cash.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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