Less than 2.5 years ago, I was unsure if Cardinal Energy (OTCPK: CRLFF) would survive the oil crisis and opted to get cash payment for the debentures I owned rather than convert them into new debentures which could then be converted into shares at C$1.25. As stocks are now trading at a multiple of this conversion price I can say I missed a huge opportunity but in 2020 I certainly did not expect oil to move into triple digit prices anytime soon.
Cardinal Energy has its primary listing in Toronto where it trades with CJ as its ticker symbol. The average daily volume of 1.7 million shares clearly beats the OTC quote where the average daily volume is around 70,000 shares. It’s still very decent and “good enough” for investors who don’t have access to the TSX, but for the purposes of this article, I’ll refer to the Canadian listing and use the Canadian dollar as my base currency throughout. of this article.
First quarter results provide a good starting point for determining second quarter and full year 2022 results
In the first quarter, Cardinal Energy produced approximately 20,600 barrels of oil equivalent, of which 89% was crude oil and natural gas liquids. The remaining 11% of the oil equivalent production rate came from natural gas sales.
With an average received price of C$109.5 for light oil, C$100.4 for heavy oil and just under C$5/mmcf for natural gas, Cardinal Energy has definitely benefited from prices high on fossil fuels.
Total revenue was C$174 million, as shown above, but average royalty payments were around 20% of revenue, reducing reported net revenue to just under C$141. million Canadian dollars. This is still almost three times higher compared to Q1 2021, although this quarter includes around C$22 million of realized and unrealized hedging losses.
The total amount of operating expenses was only C$83.7 million and about 30% of these expenses were related to depreciation and depletion. Operating expenses also increased, but this was well offset by exceptionally low transport costs. At C$1.15 million for the quarter, the average transportation cost per barrel of oil equivalent was just over C$0.60.
The quartet’s net income was C$57 million, representing EPS of C$0.38. On an annualized basis, Cardinal Energy would earn EPS in excess of C$1.5 based on Q1 results, and possibly even higher as Cardinal rapidly reduces gross debt and net debt and lower operating expenses. interests will obviously have a very positive impact. on future cash flows.
Regarding the cash flow result, Cardinal reported operating cash flow of C$50 million, but this includes approximately C$33 million in working capital investments and excludes approximately 0.4 million Canadian dollars in lease payments. Thus, on an adjusted basis, operating cash flow was C$82.5 million.
Total capex was less than C$38 million, resulting in a free cash flow result of C$44 million. That’s less than reported net income, but it’s easy to explain: Cardinal spent about 50% more on capital expenditure than on depreciation and depletion.
This is because Cardinal anticipated its capital expenditures. The full year capital expenditure forecast is C$100 million, which means that the remaining capital expenditure will be just over C$20 million for the next three quarters, which is significantly below the bill. first quarter investment. If I used the normalized quarterly investments of C$25M, the free cash flow result would have roughly mirrored EPS of C$0.38.
Back on the brink: the balance sheet is healthy and the company pays a dividend
2.5 years ago, I dared not buy the stock because I was not sure that Cardinal would survive. I decided to buy the debentures instead and then did very well on them as I more than doubled my money in just a few quarters. Unfortunately, even as things began to look up for Cardinal Energy, I decided to take the cash payment rather than convert debentures into stock. Hindsight is still 20/20 and at the end of 2020 it didn’t really look like oil was heading towards $100 a barrel so I would probably make the same choice over and over again.
Meanwhile, Cardinal Energy did everything right and its net debt evaporated extremely quickly. At the end of March, net debt stood at just C$146.5 million, and as you saw based on the first quarter results, net debt was declining at a rate of approximately 50 million Canadian dollars per quarter (depending on the evolution of working capital and capex allocation, of course). This was significant because Cardinal had promised its shareholders to reinstate the dividend as soon as net debt fell below C$100 million.
This threshold was reached during the second quarter and the company recently paid its first monthly dividend of C$0.05. On an annualized basis, this represents C$0.60 for a dividend yield of approximately 8% based on the current share price.
This is only an intermediate step. Cardinal has pledged to increase the payment as soon as net debt drops to C$50 million. Given the pace of debt reduction and the current payout ratio of 50%, I expect that threshold to be reached towards the end of this year (within a few months).
An old presentation published by Cardinal shows what the impact could be. The current presentation no longer contains this sensitivity analysis but an archived version can be found here. Please note that the old version used a capex of C$85 million which has since been revised to C$100 million.
The image above is based on a 50% payout rate. But it allows us to run the numbers using a 75% payout ratio (a 50% increase). At $90 of oil, the monthly dividend would increase to C$0.10 for a yield above 15%. But it also means that if the price of oil drops to US$70/barrel, the current monthly dividend could be maintained at around C$0.05/month.
Cardinal Energy has made a significant effort to clean up its balance sheet and net debt has now been reduced to less than 0.5 times free cash flow based on a WTI oil price of US$95. This paved the way for dividend payments to restart and Cardinal shareholders can now reap the cash with an 8% yield based on the current share price, but for those who bought in late 2021 (when j elected to receive cash for my debentures at maturity) when the stock price was trading around C$1, the yield is even sweeter.
I currently do not hold any position with Cardinal Energy. And while the 8% yield is attractive, I don’t think there’s any urgency to get into it right now from an income perspective. That being said, the stock is trading at less than 5x free cash flow at current spot prices, so it’s definitely a candidate for my watchlist, but I already have a good exposure to oil and pass on the addition of Cardinal is only a personal portfolio consideration.