Bonterra Energy (BNE.TO) is one of the Canadian oil and gas producers with the lowest production costs in its sector. This allows it to pay a very handsome dividend, but the main question obviously is whether or not this dividend remains sustainable when the oil and gas price are relatively low. Bonterra Energy has its main listing on the Toronto Stock Exchange where it’s trading with BNE as its ticker symbol. The average daily volume is approximately 138,000 shares.



The first quarter was as good as it gets

In the first quarter of the current financial year, Bonterra reported a total average production of 12,053 barrels of oil-equivalent per day, which is lower than expected and a 6% reduction compared to the first quarter of last year. This production decrease was due to the company’s service providers experiencing a high demand for their services leading to a delay at some well completions.

This issue should be solved now, and Bonterra confirmed the average production rate in April was approximately 13,100 barrels of oil-equivalent per day, almost 10% higher than the Q1 average. So we really consider the low output in Q1 to be just a bump in the road.

Source: financial statements

Despite the lower output, Bonterra’s revenue actually increased by almost 50% in the first quarter thanks to the higher realized oil and gas prices. With a pre-tax income of C$1.3M and a net income of C$475,000, the company remained at least profitable. This is not a lot of money, but the company’s cost structure contained quite a few non-cash charges. Just to give you an idea, the ‘pure’ production and transportation expense was just C$14.625M, and as Bonterra produced a total of 1.085 million barrels of oil-equivalent in the first quarter, the pure production cost per boe is just C$13.5.

Source: financial statements

This indeed resulted in very strong operating cash flows. Bonterra reported a total operating cash flow of C$24.5M, and after taking changes in the working capital position into account, it would still have generated approximately C$24.8M. This wasn’t sufficient to cover the C$30M in capital expenditures, and Bonterra’s net cash outflow in Q1 was approximately C$5M.

The dividend is fully covered on an annual basis, but wouldn’t it be wiser to invest in growth?

So if Bonterra reported a negative free cash flow of C$5M, why do we say the dividend is sustainable? After all, the C$10M in dividend payments actually increased the total cash outflow to C$15M in the first quarter.

The answer is relatively simple. First of all, Bonterra’s capex program was front-loaded. The full-year capex guidance was approximately C$70M, which means Bonterra has already spent in excess of 40% of the  full-year capex in Q1. The average capex in the next 3 quarters will be less than C$15M per quarter.

On top of that, Bonterra Energy is also increasing its production rate, and will produce on average in excess of 13,000 boe/d in the entire financial year. If we would now increase the operating cash flow by 5% (consisting of a 9% production growth and a 4% lower revenue per boe), the adjusted operating cash flow in the next few quarters will be approximately C$26M, which will be sufficient to cover the C$14M in capex, the C$10M in dividend payments whilst adding C$2M to the balance sheet in an attempt to reduce its gross debt and net debt.
Source: company presentation

So as far as we are concerned, even at US$50 oil, Bonterra’s dividend is fully covered by its anticipated cash flows thanks to the low pure production cost and the low capex needs to keep the production level at the same rate.

Investment thesis

At the current oil and gas prices, Bonterra Energy very likely won’t generate a sufficient amount of free cash flow to make a noticeable debt repayment, but the monthly dividend of 10 cents per share is absolutely safe. This means Bonterra could actually be bought for its current dividend yield whilst waiting for the higher oil and gas prices to kick in further down the road.

That should allow Bonterra to pursue a more aggressive production growth, a further debt reduction program and perhaps a higher dividend yield. For every C$3 change in the received price per barrel of oil-equivalent, Bonterra’s net revenue will increase by in excess of C$12M per year, which is approximately 40 cents per share.

Disclosure: the author has a long position in Bonterra Energy

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