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Seven Generations Energy: On Track To Produce In Excess Of 200,000 Boe/Day – Seven Generations Energy Ltd. (OTCMKTS:SVRGF)

Seven Generations Energy: On Track To Produce In Excess Of 200,000 Boe/Day - Seven Generations Energy Ltd. (OTCMKTS:SVRGF)

Introduction

It has been roughly two years since I mentioned Seven Generations Energy (OTC:SVRGF) right here on In search of Alpha. Quite a bit has occurred since then and an replace appears to be undoubtedly warranted. After a couple of troublesome years in the course of the oil worth disaster, Seven Generations seems to have regained its momentum and plans to extend its manufacturing fee by roughly 10% within the second half of the yr, 100% funded by means of inner money circulate.

VII knowledge by YCharts

Seven Generations Energy does have an inventory on the OTC, however I might strongly advocate to make use of the corporate’s Canadian itemizing as Seven Generations is certainly far more liquid up North. The ticker image in Canada is VII, and the typical day by day quantity is roughly 900,000 shares for a mean US Greenback quantity of roughly $10M.

The condensate worth actually picked up once more in Q2 2018

As fellow writer Hervé Blandin talked about in his personal article, Seven Generations Energy has put in a superb efficiency within the second quarter of the yr as the worth it acquired for its condensate manufacturing elevated by 40% in comparison with Q2 2017 and 11% in comparison with Q1 2018. The fuel worth decreased by 7% on a YoY foundation (and 12% when utilizing the typical worth of the primary semester slightly than simply the second quarter) however because of a better worth for the NGL’s as nicely, the typical worth acquired per barrel of oil-equal jumped by 26% in Q2 and 17% within the first half of the yr.

Supply: quarterly report

Contemplating Seven Generations’ manufacturing value within the first half of the yr was simply C$5.87 per barrel of oil equal and even after taking the transportation and royalty bills under consideration (including C$7.76/boe to the equation), the full manufacturing value was lower than C$14/boe. And contemplating 7G acquired simply over C$40/boe in income, the margins have been fairly substantial.

In the primary half of the yr, Seven Generations reported a internet income of C$1.52B (together with the royalty funds), however misplaced roughly C$305M on its hedging contracts (when corporations enter into hedging agreements that pressure them to promote condensate, NGL or fuel under market costs, there shall be a adverse impression on the worth of these hedging contracts). Regardless of this, Seven Generations was nonetheless capable of report a pre-tax revenue of C$41M, however because it additionally recorded a C$41.9M deferred tax cost, its backside line truly confirmed a internet lack of C$1.9M.

Supply: monetary outcomes

That’s positive, as pure oil and fuel E&P corporations aren’t recognized for giant internet income, and it’s the money movement end result that basically issues for them. Excluding the influence from unrealized losses on the hedging portfolio (however together with the realized losses) and the working capital place, Seven Generations’ working money stream within the first half of the yr was roughly C$833M. This implies a big a part of the C$1.145B in capital expenditures was self-funded by the corporate.

Supply: monetary outcomes

Buyers don’t all the time comply with borrow cash to drill extra wells to extend the manufacturing fee, however given the comparatively low internet debt (see later), the decrease value to drill wells today and the truth that the overspending leads to a significant manufacturing improve (Seven Generations elevated its manufacturing price by 18% within the first half of 2018 in comparison with H1 2017), I feel a case might be made for borrowing to drill.

The typical manufacturing fee within the first half of the yr was roughly 187,000 boe/day, however Seven Generations nonetheless expects a mean manufacturing fee of in extra of 200,000 boe/day in 2018, indicating the typical manufacturing in H2 2018 will probably be considerably greater than that quantity. Moreover, the midpoint of its capex steerage is looking for a full-yr capex of roughly C$1.7B. Which means A) the capex program was entrance-loaded as 2/three rd of the complete-yr capex has been spent in H1, and B) the complete-yr capex shall be according to the complete-yr adjusted working money stream. This implies Seven Generations isn’t doing something loopy. Sure, it’s spending its whole working money move on increasing the manufacturing, however that’s precisely what buyers in fossil fuels wish to see, proper?

The web debt doesn’t pose a danger

Typically buyers can get a bit nervous once they see the web debt of an organization, and identical to another oil and fuel firm, Seven Generations Energy is utilizing debt as a part of its capital construction. Fairly than enjoying round with (revolving) credit score amenities, 7G made the clever choice to boost the debt by issuing senior notes. This provides the corporate a whole lot of visibility on the payback interval and the price of debt (which is fastened), and because the first two bonds would solely need to be repaid in Q2 2023 (virtually 5 years from now), Seven Generations doesn’t have to fret about its internet debt place for a single second.

Supply: quarterly report

The one factor it should regulate is the USD/CAD change fee. It issued its senior notes in US Greenback denominated bonds, which signifies that the weaker the Canadian Greenback will get, the extra the (gross and internet) debt will increase in CAD-phrases (which is the foreign money 7G is reporting in).

Moreover, the corporate’s most up-to-date PV-10 calculation additionally signifies the full quantity of debt could be very acceptable given the worth of the hydrocarbon reserves within the floor. As a reminder, the PV-10 worth is calculated by unbiased consulting companies and tries to find out the entire sum of the money flows that might be generated based mostly on the recognized reserves, discounted by an element of 10% per yr. Though this calculation undoubtedly shouldn’t be seen as ‘The Truth’, it does present us with an honest overview of how priceless the reserves are, and it permits us to match the valuation of various oil corporations based mostly on the PV-10 worth.

Supply: Annual Info Type

The entire PV10 worth is roughly C$12B (excluding the Attainable reserves), however I want to use a PV15 worth for the possible reserves to combine a further low cost into the numbers. This is able to end in a complete (pre-tax) worth of C$10.3B, which is loads of ‘collateral’ to justify the present internet debt place.

Based mostly on these numbers, the sum of the pre-tax money flows after deducting the web debt is roughly C$8B, or simply over C$22/share.

Funding thesis

Seven Generations Energy is a wierd firm, because it primarily produces NGL’s and condensate relatively than ‘just’ oil and/or fuel. That’s an fascinating combine, and because the condensate worth was doing very nicely within the second quarter of the yr, Seven Generations was capable of generate fairly a bit of money from its operations. The whole quantity has been reinvested within the firm and this could end in a significant manufacturing progress within the second half of the yr.

Contemplating Seven Generations at present has a market cap of C$5.5B, the corporate isn’t small, however its market cap is justified by the excessive PV-10 worth of the reserves and the working margins which might be at present fairly excessive. I’ve a small lengthy place in Seven Generations Energy, however I could possibly be trying to improve this place relying on how the condensate and fuel markets evolve. It most undoubtedly is a really fascinating firm to regulate.

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Disclosure: I’m/we’re lengthy SEVEN GENERATIONS ENERGY.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please concentrate on the dangers related to these shares.

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