CA - Bonterra Energy: Bet On New Management

2023-12-29 16:22:28 ET

Summary

• George Fink, a long-time shareholder and former CEO of Bonterra Energy Corp., has retired.
• The company has shifted away from its income model due to the unpredictability of the energy sector.
• Bonterra Energy has shown progress in reducing debt and increasing cash flow.
• The Middle Montenay test well may well allow for a shift to oil production from natural gas production.
• There is a risk that new management may not work out, and there is elevated financial risk (that is being tackled).

George Fink, who is a major shareholder of Bonterra Energy Corp. ( BNEFF ) and ran the company "forever," has retired. This is one of many companies that had adopted an income model that was in place when I began reviewing the operations for coverage. Later, management was beginning to figure out how to recover from that when I last covered the company. Now, this management, has shed that idea because the events of 2015-2020 proved this is not a good area for an income model. That model is far more suited to places like REITs, where the income is far more predictable. That could mean the new management will set the company on a new course that is much more rewarding for investors than it was the past several years.

The Start

Back in fiscal year 2021, some subordinated deb t was converted, and cash was raised. Like many companies that adopted the income model, fiscal year 2020 converted what may have been at most an aggressive financial situation into a situation that needed immediate alteration.

The effect of this transaction gave the company some cash flexibility as well as lower net debt to the satisfaction of the lenders. But that likely came with a verbal warning for the company to "get its financial act together." A transaction involving common stock for debt often raises a warning flag to companies that rate debt.

Luckily, for the company, fiscal year 2022 was on the way with fantastic commodity prices that allowed for more financial progress than typically happened over several years.

The Current Situation

(Note: Bonterra Energy is a Canadian Corporation that reports using Canadian dollars unless otherwise noted.)

That progress led to the third quarter report :

The progress just with the comparison to fiscal year 2022 is notable. Clearly, annualized cash flow is rapidly approaching the debt balance. Normally that is the significant first step. After that, there will likely be slower progress towards a cash flow that can handle the total debt under far more conservative assumptions.

It is also notable that management did show some production growth when compared to the previous fiscal year despite the rather challenging winter situation that caused many managements to stop all but very essential operations (if they could even do that). Then there was the extra-long Canadian fire season that further hampered operations.

That small amount of growth points to some luck as well as a hard driving management determined to take advantage of whatever "edge" they had while many were sidelined by mother nature.

This winter appears to be on the far more helpful side. That could well result in faster growth in the future.

Areas Of Operation

This is a company that for a long time basically replaced declining production. All that changed with the pandemic and the Obsidian acquisition offer . Of course, management rejected the offer. But then, it needed a way to realize the value for shareholders that Obsidian saw.

As with many Canadian natural gas producers, this company often brings wells online to take advantage of the stronger natural gas pricing during the heating season. That practice is boosted by the Spring Breakup, which limits drilling in completion activities largely to the first and fourth quarters. Any activities in the other quarters is subject to the beginning and end of Spring Breakup. Therefore, not a lot gets done in the second and third quarters (relatively speaking).

Expansion

The new management is targeting the Montenay, which is becoming a very popular target.

The new management is targeting the oil window. That marks a significant shift to this natural gas producer. But it also targets the Middle Montenay, which has recently become commercial with the continuing technology advances throughout the industry.

The first well shown above will have results likely by the first quarter report. Moving from natural gas to more oil production could very well provide a profit boost even if production does not grow. But management wants to grow production as well. Therefore, this company could receive a "double boost" by way of production increases and margin increases to become a far more profitable company.

This plan is a relatively common plan being followed throughout the Montenay producing area. The interesting thing is that there are still more intervals that could become economically productive in the future.

Acquisitions

Management also announced the intentions to look for accretive acquisitions. This joins a long list of managements that I follow. These managements are taking advantage of the buyers' market to rapidly grow production while repairing their balance sheets.

The acquisition program allows the company to possibly recover faster. This would allow the re-initiation of the dividend. But this time the dividend policy will be well supported by cash flow under a wide variety of scenarios without a lot of debt. The dividend will be much lower than it was under the income plan. But it will not be betting the company on a recovery, either.

Summary

This company is following the financial recovery "playbook" that I am seeing throughout the industry. The "edge" here will likely be the ability to drill for oil while using the natural gas production cash flow. If the profitability of the new wells in the oil window is greater (as is likely), then there will be a faster recovery of the company's finances.

This could lead to a growth future that few would have foreseen a couple of years back.

The risk, of course, is the loss of a key individual or that the new management does not work out as planned. However, for the time being, George Fink can still resume running the company, should that prove to be necessary. That is a stopgap measure that few companies have available.

In the meantime, Bonterra is rapidly working its way to growing as junior companies should. If this management is successful, it could well become an acquisition candidate for the right price.

Bonterra Energy Corp. stock is a strong buy for investors that can handle the elevated risks of new management combined with repairing finances. Income investors can now look elsewhere, as this company is likely to become a growth story with some income in the future.

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