ALVOF - Alvopetro Energy (ALVOF)(ALV:CA) - Coverage Initiated
Alvopetro is well positioned to take advantage of the recent rise in energy prices. The price Alvopetro receives is set semi-annually based on oil and gas index pricing, heat content and the Brazilian-U.S. exchange rate. In February 2022, prices rose to approximately $11.28/mcf, a 59% increase over the realized price in the last quarter. With operating costs expected to remain at historical levels, the company should begin to see very large operating netbacks and free cash flow.Management is in a very enviable position of choosing between expanding or returning proceeds to shareholders. Most likely, it will do both. An initial dividend set in September has already been raised once to an indicated annual rate of $0.24 per share (yield of 7.0%). At the same time, the company has begun an active drilling program and indicated plans to expand midstream operations. Production has increased roughly 10% each of the last four quarters and shows no signs of slowing down.We see several catalysts that will move the stock higher in the next six-twelve months. Chief among these is the reporting of improved earnings and cash flow due to higher realized prices. We also believe the stock will react favorably if production continues to grow or if management announces expansion plans. Additional drilling in the years beyond 2022 will prove out probable reserves and grow the company's valuation. Finally, we expect the board to continue to raise the common dividend and perhaps buy back shares if cash flow continues to increase.Our price target for the shares of Alvopetro is $10 per share. Our price target is based a two-stage discounted cash flow analysis that assumes a weighted average cost of capital of 12%, near term cash flow projections based on current energy prices that decline each year until reaching an oil price of $60/bbl and a gas price of $3.50/mcf, and a long-term growth rate of 3% or roughly the rate of expected long-term inflation. We then adjust the present value of projected cash flows to add in expected cash and debt at the end of twelve months and divide by the expected share count. Read More >>