Bonavista’s Results and Guidance Hit by Capital Expenditure Reductions


Bonavista Energy [stock_market_widget type="inline" template="generic" color="default" assets="BNP.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is coming off a tough year during which the company had to contend with lower oil and gas prices and production. Scarce pipeline capacity created a glut of natural gas supply in Canada, which forced to pull back spending to keep a handle on production, a trend that is expected again this year.

Let’s take a closer look at the problems Bonavista is facing and see if there are any positives in store for the company this year.

Bonavista Makes an Oil Production Retreat

Bonavista’s fourth-quarter production stood at 68,011 barrels of oil equivalent (BOE) per day, down from the year-ago quarter’s output of 74,799 BOE per day. The company clocked full-year production of 69,154 BOE per day as compared to 2017’s output of 72,156 BOE per day.

Bonavista’s lower 2018 output was a direct function of its decision to substantially cut capital spending. The company’s capital outlay on exploration and development for the full year stood at C$164.5 million, down significantly over 2017’s capital expense of C$289 million. This wasn’t surprising given the company’s debt-laden balance sheet and the fall in oil and gas prices, which forced Bonavista to cut its spending and maintain positive free cash flow.

For comparison, Bonavista had increased its capital spending by 88% in 2017, but it couldn’t have done so once again in 2018 without taking on more debt. That would’ve led to a higher interest burden and squeezed the company’s liquidity. Not surprisingly, Bonavista is going to tread with caution once again this year and reduce its capital spending as the oil and gas pricing environment is still laced with uncertainty.

Uncertain Oil Price Will Be a Headwind in 2019

Combined with an increase in cash costs, the lower pricing led to a lower operating net return of C$11.99 per BOE in the fourth quarter as compared to C$14.81 per BOE in the prior-year quarter.

Bonavista will follow a tight-fisted approach once again in 2019 as far as capital spending is concerned, where they anticipate an outlay between C$130 million and C$170 million for the year. The mid-point of this range represents a reduction in capital expenditure compared to 2018, but despite the cut, Bonavista expects to maintain production of 68,000 BOE per day, an annual production nearly in line with last year’s levels. An impressive feat considering the capital expenditure cuts.

Bonavista believes that its 2019 capital plan will help it generate adjusted funds flow between C$170 million and C$200 million, though that represents a substantial drop over the 2018 figure of C$259.6 million. Bonavista’s adjusted funds flow has been falling thanks to lower prices of oil and gas. For the fourth quarter of 2018, Bonavista recorded an average price of C$19.91 per BOE as compared to C$22.65 per BOE in the year-ago period.

Combined with an increase in cash costs, the lower pricing led to a lower operating net return of C$11.99 per BOE in the fourth quarter as compared to C$14.81 per BOE in the prior-year quarter.

Bonavista witnessed an average Canadian AECO natural gas price of C$1.44 per GJ, which was the lowest in 22 years at the AECO hub. What’s more, natural gas prices in Canada during the fourth quarter of 2018 were trading at a 61% discount to the average U.S. natural gas price.

Bonavista blames a lack of pipelines and export capacity behind the depressed Canadian gas prices. Now, Canadian pipeline companies are looking to advance their investments to create more capacity. But it remains to be seen if that would lead to an increase in prices this year. As such, Bonavista shares could remain under pressure this year on account of a potentially weak performance and the lack of any strong catalysts.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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