Granite Oil: I Should Stop

The next resistance level is at C$4 per share.

Laurent Cadotte, November 7, 2017.


GXO November 13


GXO November 13


Yeah, I should stop. But it’s still a great time to buy the stock. For better or worse, management is keeping the dividend. Warning: The dividend will be cut should oil drops below $50 again.

Disclosure: I am long GXO. Not for republication on Seeking Alpha.

What’s Up With Granite Oil

It doesn’t look good from a daily point of view.

GXO October 7


And the weeklies aren’t looking good either.

GXO October 7


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.

GXO September Presentation October 7

Source: September corporate presentation

GXO August Presentation October 7

Source: August corporate presentation

GXO May Presentation October 7

Source: May 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.

GXO Free Cash Flow Projections October 9

Source: Corporate presentations and my own work.

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.

Choosing An Unlevered Canadian Energy E&P

I raised cash after selling part of my Amaya position (I bought back some, as I said on StockTwits). To let you know: I already spent that cash on Gear Energy last week. My quick calculations were right: Gear Energy is cheap.

I will be looking for a solid balance sheet just in case the rout in oil prices continues. As you know, I already own MEG Energy, a leveraged E&P company. One is enough.

I made a basic stock screening of Canadian oil E&P companies (75% or more liquids production) with low debt (total debt on equity needs to be under 30%).

Unleveraged Oil E&P - TSX Screening

TSX TickersNet debt (C$M)EV (C$M)FFO (C$M)Net debt/FFOEV/FFO

Source: Corporate presentations and my own work.

I already own Raging River Exploration. I will include the company in today’s comparison nonetheless. I have been handsomely rewarded by holding on Raging River Exploration, let’s try and repeat that.

As you know, I need an unlevered company. Gear Energy is an unlevered company in disguise for three major reasons:

First, 38% of Gear Energy’s debt is convertible to equity. The extra dilution from these convertible debentures is included in the EV/CF ratio.

Second, Gear Energy’s cost profile will improve. Indeed, the company purchased Striker Energy, a light oil producer in Western Alberta. This will increase corporate netbacks by over 25%.

Finally, Gear Energy plans to increase production by 10% next year while holding debt steady.

The additional cash flow and decreasing leverage warrant a higher EV/CF ratio. Furthermore, Gear Energy’s transformation is complete after multiple dilutive equity placements.

The company took care of its balance sheet and bought a light oil producer to diversify its production away from heavy oil. It also has an incredible board member in Neil Roszell (CEO of Raging River Exploration), which I know well.

I will update the table above with estimated numbers for next year. I believe the picture will be even clearer.

In conclusion: I’ll buy the dips.

Disclosure: I am long GXE. Not for republication on Seeking Alpha.