Yangarra Resources: Too Cheap To Ignore (TSX:YGR:CA)

Lately, the U.S. pure fuel value benchmark Henry Hub and Canadian benchmark AECO have each reached historic lows. This may be attributed primarily to the nice and cozy winter climate in North America, which has diminished demand for pure fuel, and delays in restarting the Freeport LNG terminal. As illustrated in Determine 1, these elements have contributed to a major drop in pure fuel costs in each markets.

Given the latest decline in pure fuel costs, some buyers could also be contemplating contrarian alternatives out there. On this context, we’ll take a better have a look at Yangarra Sources Ltd. (OTCPK:YGRAF), a small-cap Canadian pure fuel producer that will warrant consideration.

An summary of Yangarra

Yangarra owns 118,080 acres situated in central Alberta, the place the corporate targets the halo Cardium play at varied websites together with Ferrier, Chedderville, Cow Lake, Chambers, O’Chiese, and Willesden Inexperienced. These areas are situated across the city of Rocky Mountain Home, as illustrated in Determine 2.

In 2016, Yangarra Sources made a discovery that fracking within the bioturbated zone results in the extraction of a considerably better quantity of oil and fuel than focusing on the higher Cardium. That is attributed to the gas-charge that drives greater oil and NGLs recoveries. On account of this discovering, Yangarra amassed halo Cardium acreage and skilled fast progress in each reserves and manufacturing. As of the tip of 2022, Yangarra’s net proved and probable reserves total 120.69 MMboe, comprising roughly 60% pure fuel and 40% liquid hydrocarbons, as summarized in Desk 1.

In 2022, Yangarra produced at a mean price of 11,022 boe/d from roughly 216 wells, with 45% of the manufacturing being in liquids.

So as to overcome the problem of accessing infrastructure and oilfield companies, which can not at all times be available to small-cap operators, Yangarra made strategic investments in infrastructure and established an in-house oilfield service workforce, notably between 2018 and 2019. This has enabled the corporate to attain distinctive operational resilience, even in an inflationary setting, which isn’t generally noticed amongst small producers. Furthermore, this has helped Yangarra safe excessive margins by realizing greater commodity costs and reducing working prices.

Development

Between 2016 and 2022, Yangarra Sources took strategic steps to place itself for manufacturing progress and monetary stability. The corporate delineated the bioturbated Cardium play and expanded its acreage, whereas additionally constructing out its gathering and compression infrastructure, and fluid hauling capabilities. In 2020 and 2021, Yangarra additional strengthened its in-house oilfield servicing group by including earth shifting, highway upkeep, and rig hauling gear. In 2022, the corporate executed a disciplined drilling program, utilizing a single rig to drill 30 wells and generate important free money stream whereas lowering debt. With a wholesome stability sheet on the horizon, Yangarra is poised to provoke shareholder reward initiatives.

Reserves

Yangarra has spent the final six years studying in regards to the bioturbated Cardium formation. Initially, decline curves have been decided with out the advantage of manufacturing historical past as this was a newly found useful resource. Nonetheless, armed with a greater understanding of manufacturing historical past and up to date decline curves, Yangarra made technical revisions in 2021.

Between 2015 and 2022, Yangarra elevated web proved and possible reserves by 242% (Determine 3). As of 4Q2022, the gross proved developed producing (or PDP) reserve life is estimated to be 6.1 years, whereas the proved (1P) reserve life is projected to be 20.2 years, and the proved and possible (2P) reserve life is predicted to be 33.9 years.

Yangarra’s reported 5-year common discovering and improvement (F&D) prices as of 2022 have been C$15.69/boe for PDP reserves, C$10.79/boe for 1P reserves, and C$7.60/boe for 2P reserves.

Manufacturing

Yangarra skilled a major enhance in manufacturing between 2017-2019 by growing bioturbated Cardium, as proven in Determine 4. Manufacturing declined in 2020 and 2021 attributable to capital self-discipline in response to the Covid-19 pandemic. In 2022, Yangarra elevated common manufacturing by 23% over the earlier 12 months by drilling 32 wells working one drilling rig all year long.

In 2023, Yangarra plans to maintain one drilling rig totally utilized with a C$125 million capital funds, aiming to attain an all-time excessive common manufacturing of 13,000 boe/d.

Financials

The invention of the bioturbated Cardium play allowed Yangarra to benefit from economies of scale and cut back working prices. Investments in gathering infrastructure and proudly owning a tanker truck fleet minimized working prices. From 2015 to 2020, working prices decreased by 30% (Determine 5). Though working prices elevated by 15% in 2021 and 2022, Yangarra’s vertical integration technique by establishing in-house oilfield companies offered a hedge towards inflationary pricing in oilfield companies. As of This fall 2022, the corporate maintained its operating costs at C$7-8/boe.

Yangarra captures a C$3-4/boe oil value premium over neighboring operators by mixing oil at its truck terminals. With low prices and advantageous commodity value realization, Yangarra achieved an working netback of C$42.84/boe, an working margin of 77%, and a funds stream from operations margin of 69%.

Yangarra has achieved 5 consecutive quarters of free money stream, as proven in Determine 6. The corporate used this money stream to pay down debt, lowering adjusted web debt by $62.4 million in 2022 in comparison with the earlier 12 months. It’s anticipated to exit 2023 with a debt of C$63 million and an especially wholesome stability sheet (Determine 7). On March 27, 2023, Yangarra raised C$17.25 million of flow-through capital by an fairness financing spherical, additional strengthening its capital liquidity.

Valuation and dangers

I imagine Yangarra Sources is among the most deeply undervalued shares within the Canadian E&P area based mostly on varied valuation metrics. Firstly, it’s cheaper than the online asset worth of its reserves, with a P/NAV of 0.60X for proved developed producing reserves, a P/NAV of 0.20X for proved reserves or a P/NAV of 0.14X for proved and possible reserves, which is uncommon amongst producers. Secondly, Yangarra is among the least expensive amongst Canadian E&P shares by way of EV/Manufacturing, as proven in Determine 8. Thirdly, it trades at a ahead P/FCF a number of as little as 3.6X.

The latest decline in Yangarra’s inventory value is probably going because of the weak point in pure fuel costs (Determine 9), however there may be misunderstandings relating to its property and operations. The market should still be cautious following the 2021 reserve revision (Determine 3), despite the fact that the improved information of the bioturbated Cardium play signifies that the chance of additional revisions is comparatively low. Moreover, some buyers could also be hesitant to put money into small-cap producers because of the notion of upper operational dangers, as mentioned in a earlier article. Lastly, some buyers could not totally perceive the rationale behind the choice of Yangarra’s administration, led by CEO Jim Evaskevich, to vertically combine into oilfield companies, which has offered the corporate with a aggressive edge in managing prices and companies.

The insider possession of Yangarra Sources is important, with insiders proudly owning 16% of primary shares or 22% on a fully-diluted foundation. This degree of possession aligns the pursuits of administration with these of shareholders and supplies an incentive for them to ship optimistic outcomes.

Investor takeaways

General, Yangarra Sources represents an distinctive deep-value funding alternative within the Canadian E&P area. Regardless of its plentiful reserves, low-cost operations, excessive margins, and progress prospects, the market undervalues the corporate for my part.

Though I’ve held a major place in Yangarra Sources since March 2020, I couldn’t resist the chance to purchase extra shares when its proved developed producing reserves have been provided to me at a 40% low cost, with a FCF yield of 27.5%, 23% manufacturing progress, and a stability sheet that’s quickly being de-risked.

Because of this, I plan to benefit from any dips within the inventory value and add to my place between C$1.83 and C$1.60, notably because the inventory approaches its 200-day shifting common, as proven in Determine 10.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please concentrate on the dangers related to these shares.