NuVista Energy Stock – Thriving in the Current Price Environment (OTCMKTS NUVSF)

Introduction

NuVista Energy (OTCPK.NUVSF), a Canadian producer and exporter of natural gas, accounts for just under half of its production profile. It also produces oil, NGL, and condensate. The company is taking full advantage of the strong natural gasoline price. This allowed it to pursue aggressive growth while still maintaining its balance sheet strength.

NuVista is a primary listed company on the Toronto Stock Exchange. It trades under the ticker symbol NVA. The TSX listing offers the best way to trade in securities of the company with a daily volume in excess of 1.2million shares.

High natural gas prices helped us end the year strong.

NuVista ended the year strong thanks to its almost C$300M capital expenditures. Despite the fact that the average production rate for 2021 was just over 52,300 barrels per day, the company’s final quarter saw the highest quarter with an average production rate in excess of C$300M. Just under 61,000 barrels per day of oil-equivalent. 55% of Q4 production consisted primarily of natural gas with condensate. Oil products represented approximately 35%.

Due to a combination between a higher production rate, and a higher receiving price for the commodities manufactured by NuVista, the quarter ended with excellent revenue, income, adjusted funds flow and adjusted income. The average received natural gas price was C$6/Mcf, which was a huge help in pushing the adjusted funds flow to more than C$150M for this quarter.

Looking at the full-year results of the company, we see that they reported an Operating cash flow of C$339MThis included a C$23.1M contribution to changes in the working capital situation, and we should also deduct C$3.9M in lease payment. The operating cash flow was C$311M on an adjusted basis. This includes a realized hedge loss of more than C$100M. An underlying basis will show a much stronger performance.

NuVista generated C$24M in cash flow after the total capex reached almost C$288M. This sounds disappointing, but it is important to remember that a large amount of the C$288M capex was spent on boosting the production rate. This is also evident in the FY 2022 guidance. The company plans on increasing production to 65-68,000 boe/day (up 9-13% over the Q4 production rate). To achieve this goal, it has allocated a budget of C$300M. We also know that the capital efficiency is around C$9,100/boe/day so the sustaining capex will likely be just below C$200M.

Keep in mind that the average production rate in 2022 will be approximately 30% higher, which will result in an increase in operating cash flow. NuVista projects an annual income of $1,04,5/mmbtu at an oil price of $85 per barrel on a WTI basis. FAFF at C$390MThis means that it is aiming for an operating cash flow of C$700M over the full year. This means that the net debt will likely fall below its long-term target C$200M (based upon a maximum leverage ratio at 1X the AFF of US$45 WTI or US$2 natural gas). The net debt will not be reduced if it exceeds C$400M. NuVista will begin allocating monetary resources for additional growth and buybacks once the target has been met.

NuVista should be able to reach the C$400M net-debt target given current oil and gas prices. However, this will depend on the timing of capital expenditures.

The resent reserve update supports the current market cap.

NuVista trades with a market capitalization in excess of C$2.3B, which gives it an enterprise value of C$2.8B, assuming that there is no existing net debt. The share price has quadrupled within the last year. It is therefore important to review the reserve update as well as the PV10 calculation of future liquidity flows to ensure that there is sufficient value to support the current valuation.

Fortunately, Reserve statementIt was very satisfying to have a 2P total reserve of just over 567 millions barrels of oil-equivalent. With an average production rate at 65,000 barrels per hour, the 2P reserves support a reserve index of over 20 years.

The company also publishes a PV10 valuation of the NGLs, and natural gas in the ground. C$4.36B is the total cash flow value, discounted at 10% using the traditional discount rate (10%) After subtracting the net interest, this amounts to about C$2.9B in PV10 value that NuVistas equity is responsible.

You can also play with numbers in the table. It is possible to use a lower discount rate, 5%, for the developing and producing natural gas reserves. This would increase the PV by more than C$300M.

Keep in mind that this estimate seems to be conservative given the NYMEX average natural gas price used independently by the consultants. As you can see, the average natural gaz price in 2022-2024 is just under $3.50 MMbtu.

Thesis on investment

The strong natural gas price is allowing Canadian natural gas plays to do exceptionally well. Companies such as NuVista Energy are taking full advantage of the increased demand for fossil fuels and it looks like this trend will continue in the future. The company also has a prudent hedging strategy, as it has covered approximately 37% of the anticipated liquids production this year, and approximately 46% natural gas production (with a much higher portion of summer production being hedged at high prices).

Through my positions in Spartan Delta, (OTC:DALXF), and Topaz Energy (OTCPK;TPZEF), I have some exposure to natural gas. NuVista isn’t something I would add to my portfolio at the moment. This is not because I don’t like the company, but because I already have exposure.