NuVista Boosts Its Capex Program After Selling An Asset

| About: NuVista Energy (NUVSF)

Summary

NuVista Energy sells a non-core asset, and will use the proceeds to increase its capex spending.

The company is now planning to increase its production rate towards 29,000 boe/day.

NuVista's firs priority is to protect its balance sheet, and the company is on a mission to not spend more cash than it's generating.

Introduction

In my first article on NuVista Energy (OTC:NUVSF) in January/February, I wrote the company was able to count on its lenders to survive the glut on the oil and gas market. This provided NuVista with additional time to work out a plan to protect its balance sheet and its shareholders, and as things are looking better now, I figured it's time for an update on how the company performed in the past few months.

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Readers should be advised NuVista's Canadian listing offers better liquidity. The company is listed on the main board of the Toronto Stock Exchange with NVA as its ticker symbol. The average daily volume is 600,000 shares, and the market cap currently is US$646M.

NuVista is one of the first O&G companies increasing the capex guidance for this year

Surprisingly, NuVista announced it increased its capex guidance for FY 2016 to C$165-175M ($133M) after selling the W6 production asset (see later). This capex increase is based on the improved strip pricing of oil and gas, as NuVista expects to generate C$100-110M ($82M) in operating cash flow, and combined with the C$70M ($55M) associated with selling W6, this would allow NuVista to remain cash flow neutral and to cover all capital expenditures without having to borrow more cash.

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Source: company presentation

Because that's what NuVista had to do in Q1. 'Thanks' to the low oil and gas prices, the substantial increase in NuVista's production rate was held back and the total revenue increased by just a few percent. The income from the hedge book also increased, and much to my surprise, NuVista was able to report a net profit of C$2.5M, or 2 cents per share. Granted, that's not much, but it's truly remarkable to see a gas company (75% of the company's production rate consists of gas and NGL's) being profitable without relying on the hedge book too much (the impact from the hedge book increased the revenue by just 15%).

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Source: company presentation

Thanks to NuVista's low operating expenses (less than US$10M per barrel of oil-equivalent), the company was also cash flow positive on the operating front with approximately US$20M in operating cash flow. But as NuVista spent US$45M+ on capital expenditures, the company had to borrow some cash to fund the capex. That's not necessarily a bad thing, as it looks like NuVista spent half of the amount it originally wanted to spend this year in the first quarter, and even after seeing the upsized capex guidance, the average capex in the next three quarters should be substantially lower than the C$61M ($48M) in Q1 (I'm aiming for less than C$40M/US$30M per quarter from here on, unless NuVista increases the capex guidance once again).

The sale of W6 will help the balance sheet as the net debt will be reduced

As said before, the 60% increase in the capital expenditures was mainly fueled by the fact NuVista is selling a producing (but non-core) asset for C$70M (US$55M). The asset that has been sold produces approximately 3,200 boe/day, of which 73% is natural gas, which means the company sold these wells for US$18,000 per flowing barrel. That seems to be quite low, but NuVista also disclosed it expected the 2017 production rate of these assets to be just 2,500 barrels per day (-24%), indicating the decline rate is in the mid-twenties. If you'd use the FY 2017 production guidance, NuVista received in excess of US$22,000 per flowing barrel, and that's pretty close to the average value of other recent gas transactions.

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Source: company presentation

As NuVista produced in just excess of 25,000 barrels of oil-equivalent per day, the company would be losing 12% of its total output, but the newly designed capex program is focusing on mitigating the impact of this disposition. Due to the 60% increase in capital expenditures, NuVista still expects to produce 24,000 boe/day this year (-6% versus the average production rate in Q1). Additionally, based on the strip pricing of oil and gas, NuVista is now aiming for an operating cash flow of C$140-180M ($125M) in FY 2017 which would allow the company to boost its capex plans even more (as NuVista aims to spend as much as it's generating in operating cash flow). For FY 2017, the company expects to produce 26,000-29,000 boe/day (which would be a 18-32% increase compared to the current pro forma production rate).

Click to enlarge

Source: company presentation

NuVista's lenders are still working with the company, but the borrowing base of its credit line has been reduced to C$200M ($156M). That's still totally fine given the fact a) NuVista has only drawn down C$110M from this credit line and b) the company only plans to spend as much cash as it's generating anyway, aiming for a complete break-even situation. On top of that, NuVista has raised C$21M (US$16M) by issuing flow-through shares at C$6.65 (US$5.19) each, a premium of 9% compared to the closing price the day before this placement was announced. It's also encouraging to see insiders of the company have subscribed for almost US$0.5M of these new shares. Additionally, NuVista raised an additional C$70M (US$55M) by issuing a new senior unsecured bond, with an annual coupon of 9.875%. That's not cheap, and as NuVista claims it won't spend more than it's generating in cash flow, I'm wondering why the company is willing to pay in excess of US$5M per year in interest expenses on a loan it doesn't really 'need'.

Investment thesis

I don't mind a company selling flow-through shares, as it means the proceeds will have to be invested on the properties (before the end of this year), further increasing the possibility NuVista will indeed be able to exit the year at an average production rate close to 25,000 barrels per day (despite selling the W6 assets, reducing the average daily production rate by 3,200 boe/day).

That sale will help the company to boost the production from its Montney zone, where the netbacks are higher. The full-year operating cash flow will be C$115M ($90M) at strip pricing, indicating NuVista's current market cap of US$646M (and enterprise value of US$826M -due to the net debt of US$180M- isn't exorbitantly high).

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NUVSF over 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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