CA - At $75 Oil InPlay Oil's 7.2% Dividend Yield Appears Safe

2023-11-15 10:30:00 ET

Summary

• I expect InPlay Oil to increase its production rate towards 10,000 boe/day by the end of the year, with 40% consisting of natural gas.
• Q3 results were weak due to high capital expenditures and wildfire issues, but Q4 results are expected to be strong.
• I anticipate the company to generate C$40M in free cash flow in 2024 and it should be able to maintain its monthly dividend of C$0.015 per share.

Introduction

InPlay Oil ( IPO:CA ) ( IPOOF ) is a Canadian company with oil and gas assets in Western Canada . It should be able to increase its production rate to 10,000 boe/day by the end of this year of which about 40% will consist of natural gas. While the third quarter was pretty weak as InPlay reported a negative free cash flow due to the relatively high capital expenditures and the negative impact from wildfires in the region, the Q4 results should be pretty good, while I also anticipate InPlay to generate C$40M in free cash flow in 2024.

I was looking forward to seeing the Q3 results

During the third quarter, the company produced an average of 9,000 barrels of oil-equivalent per day , and as the image below shows, about 40% of the production consisted of crude oil with NGLs accounting for about 16% of the oil-equivalent output. This indeed means natural gas was a pretty important contributor to the oil-equivalent calculation as it accounted for almost 45% of the consolidated production.

The oil was sold at an average of C$105/barrel while the NGL prices came in at just under C$37 on a realized basis. The natural gas price was weak so there are no surprises there and as you can see below, this all worked out to a realized price of C$56.35 per barrel of oil-equivalent. Higher than in the first few quarters of the year but substantially lower compared to the third quarter of last year.

Given the low natural gas price, the revenue from natural gas was less than 15% of the consolidated revenue, even though natural gas accounts for in excess of 40% of the oil-equivalent production.

Based on the Q3 production rate and realized prices, the total revenue came in at just under C$47M and the net revenue was approximately C$41M after taking the royalty payments into account.

Fortunately the company still has a pretty low production cost and there are virtually no transportation expenses. That’s a big help as this allowed InPlay to remain profitable despite the weak natural gas price and despite the production setback. The net income was C$7.5M which translates into an EPS of C$0.08 per share.

Surprisingly, that’s pretty much in line with the results of the previous few quarters as the higher oil price compensated for the lower natural gas prices in the third quarter.

The company also published its cash flow statement and in the third quarter, it generated about C$24.6M in funds flow. And as you can see below, the total capex was approximately C$27.4M.

It is clear InPlay Oil reported a negative free cash flow result but that’s not necessarily something to be nervous about.

First of all, the Q3 production rate was severely impacted by the wildfire issues in Western Canada. This obviously had a negative impact on the production rate and it goes without saying the lower efficiency had a negative impact on the cash flows too. According to InPlay Oil, it was able to ramp up the production rate gradually and its output increased to 9,700 boe/day by early November. This should increase throughout the quarter as two new wells were still in the cleanup phase and weren’t contributing to the total result yet.

What does this mean for the rest of this year?

It is also important to note the majority of the drill program has been completed and this means the company’s Q3 and 9M 2023 capex was substantially higher than what we should be able to expect in the final quarter of this year. This indicates the free cash flow result in the current quarter should be pretty strong. According to the company, it will be able to report the highest quarterly adjusted funds flow for this year. The total capex for this year was budgeted at C$75-80M and with C$70M spent in the first nine months of the year, it now looks like the Q4 free cash flow result could easily exceed C$20M.

InPlay Oil will release its 2024 capital and production plans in a few months, and I am looking forward to seeing if the company can indeed maintain the current guidance . As you can see below, InPlay expects to produce 10,250-11,250 next year and using an oil price of $75 and around C$4 for the natural gas.

Applying a natural gas price of C$3, I expect the AFF to come in at around C$120-135M and assuming a C$80M capital program, the company should still be able to generate C$40-55M in free cash flow. Considering there are just under 90M shares outstanding, the lower end of that guidance would result in a free cash flow result of around C$0.44-0.45 per share, and that includes the investments in additional production growth.

This also means the current monthly dividend of C$0.015 is fully covered by the cash flows. Even when we look at FY 2023, the dividends should be covered. I think it’s fair to assume an operating cash flow of C$100M is reasonable and assuming a full-year capex of C$80M, the C$20M in free cash flow will be sufficient to cover the C$16M in dividend requirements.

Investment thesis

I have a long position in InPlay Oil as I think the stock is too cheap from a fundamental perspective (it is trading at less than 6 times the anticipated free cash flow in 2024, including the growth capex). Additionally, I also really like the monthly dividend payments of C$0.015 per share. The C$0.18 annualized dividend represents a dividend yield of 7.2% and as I explained in this article, the dividend is very well covered. And with a net debt of just C$41M, the balance sheet is pretty robust as well.

I may add to my position on additional weakness.

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