You Should Buy This Oil Stock Despite Weak Pricing

The recent weakness in oil prices has proved to be devastating for Surge Energy [stock_market_widget type="inline" template="generic" color="default" assets="SGY.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock, which is currently down 14% for the year. The stock had got off to a great start as oil prices were on the mend earlier this year, but the bad news is that it doesn’t enjoy that tailwind anymore.

What’s more, there’s a probability that oil prices could keep sliding because of a combination of negative factors. In such a scenario, can Surge Energy stock make a comeback? Let’s find out.

Surge Energy Stares at a Difficult Year

Thanks to the massive production jump, Surge Energy’s operating cash flow increased 19% year over year to $28.9 million.

Surge Energy closed 2018 on a high. Its revenue had shot up incredibly last year thanks to a combination of higher prices and a nice production bump and they have managed to sustain that momentum in 2019.

For the first quarter of fiscal 2019, the company’s quarterly average production increased 35% year over year to 21,630 barrels per day. The company pointed out that 84% of its first-quarter production was liquids as compared to 81% in the prior-year period.

Thanks to the massive production jump, Surge Energy’s operating cash flow increased 19% year over year to $28.9 million. What’s more, its adjusted funds flow during the quarter was up an impressive 49% to $41.9 million.

This impressive performance from Surge Energy was a result of flat oil pricing during the quarter. The company’s average realized price of crude oil was flat year over year at $57.72 per barrel. However, the price of natural gas liquids was down 14% year over year to $41.86 per barrel. But natural gas prices rose a massive 183% year over year.

As a result, Surge Energy’s netback per barrel of oil equivalent increased 12% year over year to $27.12 during the quarter.

In all, Surge managed to turn in a really strong performance last quarter thanks to its top of the line operational execution and help from stable oil pricing.

Weak Oil Pricing Could Dent the Momentum 

The bad news for Surge Energy is that the impressive increase in production that it is delivering could be tempered by lower oil prices. WTI oil prices have already pulled back substantially over the past few weeks, and the situation in Canada is no different because of the lack of pipeline capacity. As reported by the Financial Post:

U.S. West Texas Intermediate crude was largely unchanged Friday at US$57.91 a barrel — a weekly drop of nearly 8 per cent — its biggest weekly decline since December. In contrast, the WCS fell 16.7 per cent during the week, and has descended into bear market territory after falling more than 26 per cent from its year-to-date peak of US$56.30 on April 8, Bloomberg data shows.

Despite this headwind, analysts expect Surge Energy’s sales to grow substantially this year, while it is also expected to report a profit as compared to a loss in 2018, likely due to the company efficiently growing its production this year.

The company’s capital expenses are expected to decline to $100 million this year as compared to $120.5 million in 2018. Despite the lower capital expenses, its production is expected to increase 22% in 2019. So, it would be a good idea to stick to Surge Energy stock as it could do well even in a weak oil price environment.

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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