CA - Yangarra Resources: Growth Year Ahead

Summary

• Yangarra Resources Ltd. stock should benefit from declining leverage.
• The debt was compliant through fiscal year 2021.
• Yangarra Resources made money in fiscal year 2020 and avoided any impairment costs as a result.
• The Company appears to be on track to repay about 1/3 of its debt balance.
• The interval produced is extremely profitable.

(Note: This is a Canadian company that reports in Canadian dollars unless otherwise stated.)

Yangarra Resources Ltd. ( OTCPK:YGRAF ) has an ambitious year ahead that includes both production growth and debt repayments in the fiscal year ahead. Both management and at least some on the board of directors have experience in building and selling companies. So, growth is likely to remain emphasized for some time to come over dividends.

There is also an emphasis on debt repayment, as this market appears to value financial strength.

Antero Resources Corporation ( AR ) kind of mapped out for a United States natural gas company what it means to the stock price as certain financial measures improve. This would explain to some extent why a Canadian company would choose to continue to reduce debt as well and grow production. Capital gains are often more significant than dividends throughout the company life because capital gains often result in compounded returns whereas any compounding return of dividends is often much smaller and accomplished by the investor successfully reinvesting dividends received.

Right now, the market places a premium on strong finances. In addition, the market loves a growth story in the long run. Therefore, Yangarra Resources Ltd. is catering to the market even if it is skipping the part about a dividend return. That dividend return will likely mellow over time as the market realizes that the last five years or so are very likely an anomaly.

The compan y appears to be on-track to eliminate about one-third of its beginning debt for the fiscal year. In fact, the latest update has net debt at roughly C$134 million. The announcement, of course, is subject to a final audit and filing with Sedar. That is an unusually large percentage repayment amount for any size company to pay down in one year. Management appears to want to do the same thing in the next fiscal year. On a percentage basis, these wells are profitable enough in the current environment for production to grow while that debt reduction continues.

The exit rate may be disappointing to some as it has come down. But the growth rate of the previous production appears to be decent even with the lower figure. To me, the key point would be the relatively low percentage of capital needed to grow production. That implies decent well profitability in the current environment.

The breakeven shown above uses some fairly conservative price assumptions when compared to the actual prices of the past year. So, there is going to be a cushion in the management projection as a result of the assumptions used above.

The other thing to notice is that the curve declines much less than is the case for a typical unconventional well. So, when results are compared elsewhere, that is something to keep in mind. It also explains why the budget is a relatively low part of the cash flow, even including double-digit production growth in the next fiscal year.

Also notice that the majority of the oil production is front-end loaded. The production mix appears to get gassier as the well ages. So, this company needs to keep drilling to keep the percentage of oil produced level. During an industry downturn when many companies idle drilling rigs, the production here would become gassier over time from the slide above.

2020 Net Income

The unusual profitability of Yangarra Resources Ltd. wells is bolstered by not only the cash flow but the reporting of net income in fiscal year 2020. That is a year when a lot of companies in all kinds of industries lost a lot of money.

The oil price that fiscal year went negative for a short time, which will likely make that a memorable year for a very long time to come. Most companies sold their oil ahead and so missed that milestone. Instead, it was likely that traders were the ones paying the negative prices that made the news.

Needless to say, making any profit in fiscal year 2020 was a major achievement. A lot of companies lost money and had to take impairments as well. A company making money like this one avoided an impairment charge.

Guidance

Yangarra Resources Ltd. expects to average about 13,000 BOED in the 2023 fiscal year. Supposedly, January 2023 had production in the 12,000 range. It is not unusual for production to climb before Spring Breakup in Canada, as the second quarter often has lower activity until Spring Breakup is over. In this fashion, the wells completed produce for the lucrative natural gas heating season - that helps to raise return on investment.

Yangarra Resources Ltd. management likely will also be paying down a good chunk of debt. The bank line was recently renewed at $180 million. This likely means that management has production to the point where they no longer need to use debt to grow. Certainly, the robust price environment helps that goal tremendously. However, pandemic definitely delayed the arrival of that accomplishment.

In the future, Yangarra Resources Ltd. is likely to continue to increase production at a double-digit rate easily. Once debt gets repaid, there will be more money to grow as well as a potential dividend or share repurchases for shareholders. However, this company is likely to be built to be sold at some point for a decent price. Therefore, the emphasis will likely be on growth.

Key Takeaways

Yangarra Resources Ltd. management had an unusually profitable interval to exploit before natural gas prices strengthened. The current natural gas price environment has made the later gassier production far more valuable than it was years ago, when management discovered the current interval to produce. Those robust natural gas prices make this interval far more valuable that was the likely assumption a few years back.

This is one of very few managements that is able to grow production while repaying substantial amounts of debt. The profitable fiscal year 2021 was a major accomplishment. All of this points to an operation with a very low breakeven point. This company will be able to drill in a pricing environment where competitors are waiting for a recovery. For a small company, Yangarra Resources Ltd. management has discovered some very low-cost resources.

The management has now begun to take advantage of the savings that comes with a larger operation. That begins with using one drilling rig full time. But it also includes the purchase of some equipment before prices went up as well as some other operations improvements. The oil is still trucked to the selling point. But that too could change once operations reach a certain size.

Yangarra Resources Ltd. management has built and sold companies before. Therefore, some of the small company risks are reduced. The leverage on the balance sheet is being handled. So financial risks are going down. Yangarra Resources Ltd., despite its small size, is one of the safer upstream companies for investors to consider.

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