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Eric Nuttall Seven Generations Energy Ltd VII-T BUY Sep 18, 2020

He has been adding to his position. They have successfully transitioned from a growth story. They are now into maintenance mode. Their free cashflow has now gone up and they can generate $350M of free cashflow. The company may start looking into share buybacks.

Eric Nuttall

Owned

Unlock Rating

$4.290

Stock price when the opinion was issued

Energy

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They are a liquids producer. The problem he sees is their high decline rates. They have a high replacement requirement. He is watching it but it is not a name he is covering right now.

COMMENT

VII-T vs CR-T? He would stay away from CR-T due to its debt level. VII-T has a good management team, but its slow down in growth highlighted their 50% decline rates in existing assets. This causes too much of their cash flow to still be required for maintenance. He would prefer NVA-T, which trades at a lower multiple of cash flow, has a better balance sheet, and lower decline rates on production.

DON'T BUY

They are a condensate focused producer -- it trades at a premium to WTI oil prices. They have made efficiency gains, but still face a very steep corporate production decline curve. There are better names out there.

RISKY

He thinks natural gas will be the energy of the future. He is not an energy expert. He has gone with Peyto. Consider taking small positions when there are big market down days. But they must be good companies that will survive. 7 out of 10 of these companies may go under. Think of them as call options.

BUY

At single digit oil, bankruptcies were a worry. He thinks we are no longer at that level. Unless a second dramatic wave of COVID occurs, demand for oil should continue to improve. VII gives exposure to natural gas, but they are also the largest condensate producer in Canada. He believes condensate price weakness is going away as the heavy oil differential has shrunk to only $4 per barrel. This is a sign the demand for Canadian heavy oil is strong. The company has brought down its corporate decline rate. This could triple or quadruple in value, he thinks.

COMMENT

70% revenue from condensate? Oil prices has recently rallied due to OPEC agreement extensions and a recovery in demand. Associated natural gas production has begin to rise again and natural gas prices have fallen. He thinks a large oil sands producer using condensate may take advantage of this company and consider it as an acquisition target and a re-rate candidate.

BUY

A core holding. Management has done a good job repositioning the company. They are slowing production growth and maximizing free cashflow. They are deleveraging. Their ability to generate free cashflow is extremely high. 16% free cashflow yield at $50, and 34% free cashflow yield at $60.

TOP PICK

They're 45% into natural gas and 55% liquids. They exposes you to an improving natural gas business. They've reduced their growth rate in recent years, which lowered their decline rate. So they generate more free cash glow. The market doesn't appreciate how quickly their business model has changed. Based on $60 oil, he sees 190% upside. Hopes they keep production flat so they can later buy back all their shares. (Analysts’ price target is $8.81)

PAST TOP PICK

(A Top Pick Feb 09/21, Up 9%) Continues to hold.

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Eric Nuttall Seven Generations Energy Ltd VII-T BUY Sep 18, 2020

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