As explained in my previous articles on NuVista (OTCPK:NUVSF) (TSX:NVA:CA), this Canadian natural gas producer is an interesting story to follow. Unfortunately, the price of AECO natural gas is quite low these days, but NuVista has a cover story part of its production, and this, combined with still strong condensate and NGL prices, should ensure that the company’s cash flow will remain strong.
NuVista has a primary listing on the Toronto Stock Exchange where it trades with NVA as its ticker symbol and a market capitalization of just over C$2.3 billion. With an average daily volume of over 900,000 shares, listing on the TSX is clearly the best option for trading the company’s securities. NuVista’s largest shareholder with a stake of over 16% is Paramount Resources (POU:CA) (OTCPK:PRMRF) which I discussed in this recent article.
Despite hedge losses, Q2 cash flow was superb
In the second quarter of this year, NuVista saw its production rate decrease slightly to just over 65,000 barrels of oil equivalent per day. About 60% of its oil equivalent production is made up of natural gas, with just over 30% of the barrel equivalent provided by the production of condensate (which is sold at a price similar to the price of oil). NGLs accounted for about 10% of production and thanks to a price increase of 154% over the second quarter of last year for NGLs and 72% for condensate, these “by-products” added quite a bit value to NuVista’s production. manufacturing profile.
The combination of a higher production rate (compared to the second quarter of last year) and much higher oil and gas prices resulted in an increase in total revenues of more than 150%, from 188 M CA$ to just over CA$463 million. And as you can see below, although condensate made up just over 30% of oil equivalent production, it made up about 60% of total revenue, so while NuVista is for sure a gas player production-based natural gas, in fact, is not the most important product.
After deducting royalties payable on the production of these fossil fuels, net revenue was approximately C$392 million, and after taking into account hedging, total revenue was C$395 million. As you can see below, NuVista made over C$75 million in hedging losses, but on other positions, it recorded an unrealized gain of almost C$79 million. And as oil and gas prices have continued to fall, some of those unrealized gains will likely soon be monetized.
Total operating expenses were just under C$165 million, meaning NuVista reported pre-tax income of C$231 million and net income of just under C$178 million. Canadian dollars for an EPS of C$0.78. A very good quarter indeed.
The cash flow result was also quite strong, but investors are cautioned that operating cash flow includes hedging losses but does not include hedging gains until they are realized. The C$228 million in operating cash flow sounds pretty impressive, but there are a few things to consider here.
First, there was deferred income tax of almost C$53 million. This is good for now as NuVista does not expect to be taxable this year, but in its management discussion and analysis document the company clearly mentioned that it expects to be taxable in cash in 2023.
Second, there was a contribution of C$29 million from changes in working capital, while third, the company also spent C$1.3 million to make lease payments. Adjusting cash flow from operations for all of these items would result in cash flow from operations of C$145 million. Keep in mind that this still includes the approximately C$76 million in coverage losses.
Total capex was approximately C$115 million (bringing first-half capex to just under C$235 million). However, it is important to realize that capital expenditure includes a substantial amount of growth investment. As you can see below, NuVista’s planned sustaining investments are just under C$250 million. So I’m going to add about 10% and use sustaining investments of about C$70 million per quarter. Adjusted cash flow from operations in the second quarter would have been approximately C$75 million or approximately C$0.33 per share.
This means that even if you include the C$75.5 million in hedging losses, NuVista is generating north of C$1.3 per share in free cash flow. And the image above tells us something else: even if oil rice fell back to just US$65 WTI with NYMEX natural gas at US$3, operating cash flow would still be around 550-575 million. Canadian dollars, resulting in a free cash flow result of C$300 million. While you could argue that the AECO price is lower, keep in mind that NuVista often covers the NYMEX/AECO differential as well. On top of that, natural gas is really just a by-product of condensate production, so the price of oil will be more important to NuVista than the price of natural gas.
NuVista Energy has a reputation as a natural gas producer, but at today’s commodity prices, the price of oil is more important because its condensate production is (still) more valuable than natural gas production.
Thanks to the strong performance in the second quarter, NuVista’s net debt (excluding lease liabilities) decreased to just C$280 million (although the working capital deficit of C$113 million should also be taken into account here). And although the price of oil and gas (excluding NYMEX) weakens over the summer, cash flow sensitivity analysis clearly shows that even at $65 of WTI and $3 of natural gas, NuVista still trading at a free cash flow yield of 12% to 13%.