Eric Nuttall Surge Energy Inc SGY-T DON'T BUY May 23, 2024

Trading at discount to NAV. Out of favor small cap name. TMX completion will benefit company. Benefiting from fish bone drilling technique. New wells paying out in months. At $80 oil, company trading at 3x cash flow yield. Expecting a 40% upside from current share price. 

Levered to oil price. Changed asset base toward profitability and scalability. Needs to improve drilling efficiencies and margins. Good job reducing debt. Probably by early 2024, can move return of free cashflow to shareholders from 25% to 50%. Yields just over 5%. He's focused on bigger players with more consistent dividend payments.

The Canadian energy space will do well over time. He isn't long SGY, but likes it.

Nothing to do with balance sheet or management, but it remains too small to be relevant to larger investors. Scale isn't there.

EPS missed estimates of 16c coming in at a loss of 4c. Revenue beat estimates of $157.1M coming in at $158.17M declining 2% year-over-year. Because of depletion and other charges, cash flow is a better metric than earnings for energy producers. SGY had per share cash flow of 62c, down from 64c but certainly better than what the net loss implies. The company also confirmed 2024 production guidance. We think management is fine, however the stock will need commodity prices to pick back up in efforts for a turnaround. Mr. Colborne (CEO) has built and sold several companies within the sector. We would say HOLD for income. The debt reduction is still ontrack to finish by the end of this year while it is cheap and has an attractive yield. Management also seemed positive for on oil prices. But mostly it is valuation: the stock is very cheap on all metrics. 
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Well run. But it's a small cap, and that's just not where investor focus is, so sentiment is not behind it. Good exposure to heavy oil, phenomenally profitable now. Great yield of 6.9%. Strong balance sheet. Trades inexpensively.

Company too small to hit institutional radar screens. Quality company, but better options in markets. 

He sold at higher levels than current. There's no investment money flowing into the oil patch, because international investors perceive the federal government as hostile to energy. No buyers. Surge is well run, drills great wells, pays a good dividend and buys back stock.

SGY is quite small at $510M, but the stock is very cheap. With a 10% dividend, a buyer (or privatization) could eliminate the dividend and use internal cash flow to pay for the whole company in about three years. But, that doesn't mean it will happen. Takeovers in the sector typically need to be friendly and we highly doubt management would want to sell out anywhere near the current price plus a premium. WCP, TVE might take a look. We would see a merger or a privatization as more likely than a takeover, but would not bet on this possibility.
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