Bonavista Energy’s Problems Might Not End Soon


Bonavista Energy [stock_market_widget type="inline" template="generic" color="default" assets="BNP.TO" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has witnessed a massive crash this year, losing nearly two-thirds of its value so far despite taking steps to overcome the weak oil pricing scenario. The company had said at the beginning of its ongoing fiscal year that it will prioritize lowering capital expenses and try to remain cash-flow positive.

But that strategy hasn’t worked for the company just yet and its stock has tanked. With Bonavista stock now trading at penny stock levels, does it make sense to bet on it in anticipation of a turnaround? Let’s find out.

Weak Oil Prices Have Taken a Toll on Bonavista

Bonavista’s focus on keeping capital expenses under check has proved to be a headwind for the company’s output. It delivered production of 66,937 barrels of oil equivalent per day during the first quarter of 2019, down 8% from the prior-year period’s output of 72,417 BOE/day.

The drop in Bonavista’s production, along with the fact that its realized oil price fell 6% year over year to $20.54 per BOE weighed on the company’s top line. Bonavista’s revenue was down 13% as a result of these two factors. But this wasn’t the only problem with the company last quarter.

Bonavista saw a spike in its costs as well. Its operating expenses increased 4% year over year, while transportation expenses increased 17%. As a result of the higher expenses and lower pricing, Bonavista’s operating netback fell 9% year over year to $11.92 per BOE.

Weak oil prices were the biggest problem for Bonavista last quarter, and the company’s performance can only pick up the pace if oil prices in Canada start inching higher.

Canadian Oil Prices Will Continue to Be Volatile

The increase in Alberta’s oil production has proven to be a headwind for WCS oil prices.

Western Canadian Select (WCS) oil prices got off to a great start this year thanks to the Alberta government’s mandated production cuts. These cuts worked for some time as prices rose, but at the same time, they also caused problems with respect to transport of oil.

Moreover, the problem of pipeline capacity in Canada continues to persist, and the Alberta government has started easing the production cuts. Production has been allowed to increase by a total of 50,000 barrels per day over the months of May and June, with total production rising by 150,000 barrels per day since the beginning of the year.

The increase in Alberta’s oil production has proven to be a headwind for WCS oil prices. The good news is that Canada is now working toward expanding its pipeline in order to improve market access. As reported by the Alaska Journal of Commerce:

The industry received some good news when the government of Prime Minister Justin Trudeau on June 18 ruled that expansion of the Trans Mountain pipeline could proceed. The expansion will almost triple the line’s carrying capacity to 890,000 barrels per day from the oil sands pipeline hub of Edmonton to an export terminal in Burnaby, British Columbia. Construction could begin as early as this year.

So there’s a chance that Canada’s oil pricing scenario could improve going forward, but investors shouldn’t be hoping for a quick turnaround because it will take time for the pipeline capacity to be built.

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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