Is Bonavista Energy A Safe Dividend Play?

| About: Bonavista Energy (BNPUF)

Summary

Bonavista's dividend has been cut again to a monthly distribution of $0.01 per share.

Bonavista's operational efficiency improvements a welcome change - capex and dividend yield appear to be manageable in the short-term.

The potential for oil prices to bounce back and regress to the mean provide hope the dividend can be sustained.

Bonavista Energy Corp (OTCPK:BNPUF) has historically been a great dividend pick, but has seen its dividend slashed and stock price depreciate to the tune of 90% over the past five years. While the dividend has been cut a number of times recently, with the most recent cut to a $0.01 quarterly distribution, taking into account Bonavista's corresponding drop in stock price, the dividend remains modest and deserves a deeper look. We will assess how likely the dividend can be sustained over the long-term and what Bonavista's outlook is over the long-term.

Click to enlarge

Dividend History

Bonavista has a strong history of dividend distributions to shareholders. While management has stated its intention to continue dividend disbursements, the recent cut to a $0.01 quarterly distribution from a $0.07 monthly distribution has been a big shock to the stock price, and the market has reacted accordingly. We believe management's move to reduce the dividend by 67% is a prudent short-term move, and the subsequent reduction to a 1.3% dividend yield from a yield of 4% is called for in the current economic environment.

Operating Efficiencies

Bonavista has undertaken a number of initiatives which we view as short-term strategic moves to maintain operational efficiency and shore up the balance sheet in reaction to the significant drop in oil prices, which have allowed Bonavista to maintain its modest dividend payout. Among these maneuvers, Bonavista's capital expenditure cut of approximately 50% combined with a meaningful dividend cut have meant that the total payout (capex + dividend distributions) totaled 94% of cash flow from operations. These moves to maintain the stability and sustainability of cash outflows is seen as a positive for income investors who may be worried about Bonavista's ability to continue to maintain their existing dividend program. In the long-term, we expect capital expenditures to revert to "normal" levels, and we anticipate the current dividend yield to be relatively secure.

Additionally, one of the most promising lines on Bonavista's balance sheet is the significant reduction in cash costs of operations YOY. Bonavista has been an industry leader in reducing its cost of production, realizing a 12% decrease in cash costs of production in addition to a 20% drop in overall production costs. Bonavista's expenditures relating to the development of proved and probably reserves were also reduced by 33%, generating a recycle ratio of 2.2:1.

Further, Bonavista has removed 14% of active wells and 20% of abandoned but unclaimed wells. Bonavista generated funds from operations of $95.8 Million ($0.44 per share) in Q4 2015 during a period of time in which related commodity prices saw a drop of 23% and overall production revenues decreased by 44% YOY.

Click to enlarge

(Source: Bonavista 2015 Annual Report)

These operational efficiency improvements are another reason we remain confident Bonavista will be able to continue to distribute dividends in the long-run.

Debt Position

Bonavista's debt to asset ratio is increasing at a significant rate, mostly due to the fact that the long-term debt Bonavista is forced to incur is increasing while Bonavista's asset base has decreased in value due to increased divestitures and reduced capital expenditures. The long-term debt to equity ratio is up from 0.233 in 2014 to 0.359 in 2015.

Click to enlarge

(Source: Bonavista 2015 Annual Report)

Bonavista has issued $241 Million in long-term debt in 2015. To combat Bonavista's current reliance on debt, the company has made significant and necessary financial cost-cutting decisions in 2015. Among these, the divestment of approximately 2,200 boe per day of non-core high cost assets with operating costs in excess of $15.00 per boe is expected to provide some short-term benefit to Bonavista's balance sheet moving forward. The company's production and development activity is now largely concentrated in two core areas in Alberta. The company will continue to create value through asset swaps and acquisitions of farm-in opportunities in these areas, in addition to strategic undeveloped land purchases. The quality of projects operated by Bonavista has improved, and the low-cost reserves currently producing provide a reliable and predictable production base.

Capital Expenditures

Bonavista's 2014 and 2015 capital expenditures are shown below. The recent concentration of capital expenditures on core assets may prove to be a tailwind for Bonavista, and we expect that over the long-term, capital expenditures may increase with the potential for a long-term rebound in commodity prices.

Click to enlarge

(Source: Bonavista 2015 Annual Report)

Oil Outlook

We see the overall long-term outlook for oil being much more bullish than other analysts assessing the market today. While we may not have seen the exact bottom in oil, we have seen overall production slow and start to drop off, particularly in North American shale production levels. This drop in production represents a reaction of the market to this temporary dip in prices.

Bonavista has felt the pain delivered by depressed commodity prices and has management has reacted accordingly, positioning Bonavista as a contender to weather the storm in the long-run, contributing to our view that Bonavista will likely be able to maintain some form of a dividend moving forward, given the corporate focus on operational efficiency and dividend distributions. Not ruling out further short-term dividend cuts, we like the company's dividend mandate and are expecting that long-term capital distributions to shareholders will continue.

Conclusion

It is unclear whether Bonavista will be able to continue to extract as much value from operational efficiency improvements as have been gleaned in 2015, and we are concerned with Bonavista's current cash position and reliance on debt. While Bonavista still provides a modest dividend to investors, we do not see enough value in this stock to justify taking a position at this time. We maintain a "wait and see" approach with this stock, and will monitor Bonavista over the next 12 months before making any further assessments.

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.