It doesn’t look good from a daily point of view.
And the weeklies aren’t looking good either.
So what’s up? Well, we are back to the lower for longer rhetoric.
And if oil prices are lower for longer, then Granite Oil’s whole business model is in big trouble. Especially if we look at current and past guidance from management.
Source: Granite Oil, September 2017 Corporate Presentation
Source: Granite Oil, August 2017 Corporate Presentation
Source: Granite Oil, May 2017 Corporate Presentation
What can we see:
- We know management is planning for lower for longer;
- $55 WTI is expected until 2021 compared to 2018 before;
- Capital expenditures are lower, and therefore production growth is almost nonexistent;
- And… The juicy dividend is maintained nonetheless.
This is the reason the market is reacting: Management is definitively holding the dividend steady. This is big trouble for Granite Oil’s business model, should oil prices hold $50 in the long-term.
Source: Cadotte Capital Partners
As we can see in the graph, free cash flow is negative years out using $50 WTI. Debt will increase, and there won’t be any cash to make up for it.
Not to mention bullish assumptions, including a tight WTI/WCS differential and an advantageous foreign exchange rate.
In all, Granite Oil will need higher oil prices for the stock to be worth something. $50 WTI isn’t enough, and it’s the price the market expects in the medium to long-term.
Disclosure: I am long GXO.