Three months ago, I discussed NuVista Energy (OTCPK:NUVSF), a Canadian natural gas producer that still flies under the radar. In March, I appreciated the company’s focus on reducing net debt and strengthening its balance balance sheet, and thanks to the high price of natural gas, the balance sheet is now improving very rapidly. NuVista expects net debt to decline to C$200-250 million by the end of this year and the board has approved a share buyback plan which should help create more value all along the line.
NuVista’s primary listing is on the Toronto Stock Exchange, where it trades with NVA as its ticker symbol. Average daily volume exceeds 1.5 million shares.
High Natural Gas Price Fuels NuVista’s Financial Results
In the first quarter of this year, NuVista saw its oil equivalent production rate increase by approximately 45% to just over 66,000 boe/day. Natural gas production increased by 36% while condensate production increased by more than 70%. And while NuVista is obviously primarily a natural gas producer, the contribution from condensate sales provides a nice by-product revenue as not only has production increased over 70%, but the price of condensate has jumped 69%. while the price of natural gas increased by only 53% to a realized price of C$5.79/mcf.
The higher price received was also caused by the high price of natural gas in Chicago, where the price of natural gas was close to US$6/cfm during the quarter. Meanwhile, NuVista is also able to sell its natural gas in Canada at a price above the AECO benchmark price because its products have a higher heat content.
The combination of a higher production rate and higher prices resulted in a 150% increase in total revenues to over C$380 million and after taking into account royalty payments and realized and unrealized losses on the hedges, net revenues were approximately C$253. M (which is still nearly 150% higher than Q1 2021).
As you can see in the image above, NuVista is still a low-cost producer, which has helped the company report pre-tax income of almost C$91 million and net income of a just over 70 million Canadian dollars for an EPS of 0.31 Canadian dollars. /to share. This is quite impressive, as pre-tax income was actually reduced by more than 50% due to realized and unrealized hedge losses.
The statement of cash flows provides a good overview of the cash generated by NuVista, including realized hedging losses but excluding unrealized hedging losses (which will obviously be realized over the next few months and quarters). Cash flow from operations, adjusted for changes in working capital position and lease payments, was $183 million (including approximately C$45 million of realized hedging losses).
Reported capital expenditures were approximately C$120 million, as you can see above, resulting in a free cash flow result of C$63 million. This includes a deferred tax payment of just over C$20 million, so if we included a normalized tax payment the adjusted operating cash flow was C$163 million while the cash flow reported free cash was C$43 million.
That doesn’t sound very exciting, but keep in mind that NuVista is investing in growth as it wants to increase its production rate to reach its full processing facility capacity of approximately 90,000 boe/day. NuVista initially planned to spend approximately C$300 million in capital expenditures, but given the current tailwinds, the company has raised its investment forecast to C$365 million. This increase in guidance represents average quarterly capital expenditures of just over C$90 million, so it’s pretty clear that the company has focused its capital expenditures.
The net debt level objective has been achieved – what next?
NuVista planned to initiate a share buyback program as soon as it reached its desired level of net debt. This level was calculated based on maintaining a debt-to-adjusted cash flow ratio below 1 using $45 WTI and $2 NYMEX natgas.
This long-term sustainable baseline net debt level of C$200-250 million has now been achieved, and NuVista is committed to spending 25-50% of its quarterly adjusted free fund flow on share buybacks. Unfortunately, NuVista doesn’t mention a dividend, so (intangible) stock buybacks will be the only thing the company spends its money on. NuVista has filed an application to buy back up to 10% of its float, and it expects to be able to begin buybacks in the second half of this month.
And as net debt continues to decline while adjusted free funds flow will remain relatively stable with a forecast of C$450m in 2023 based on $85 WTI and US$4 natural gas, NuVista is well positioned to step up its efforts. share buybacks. Assuming it will actually spend C$225 million to repurchase shares next year, the company would be able to repurchase and cancel about 17 million shares, or almost 8% of the number of shares.
NuVista is taking advantage of high natural gas prices to quickly clean up its balance sheet, paving the way to start rewarding its shareholders. It is perhaps a little unfortunate that the company is not yet considering paying a dividend, because even a nominal dividend of 10 cents per quarter would result in a dividend yield of just over 3% when it would cost to the company less than 90 million Canadian dollars per year.
That being said, if natural gas prices remain high, it makes sense for NuVista to try to buy back its shares now, in anticipation of a higher rate of production (and cash flow) later, as the company expects to gradually increase production. around 90,000 boe/day. Once this production platform is reached and the price of natural gas remains relatively high at US$4 on a NYMEX basis, free cash flow per share could easily exceed C$2/share (depending on the number of shares that NuVista is able to repurchase and cancel by the end of 2024).
I currently have no position in NuVista Energy as I am exposed to the price of natural gas through positions in other companies, but NuVista is executing its growth plans well and its stock price should continue to do well .