Will Cardinal Energy Stock Sink or Swim?


Cardinal Energy[stock_market_widget type="inline" template="generic" color="default" assets="CJ" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has done extremely well to hold its ground in an unfavourable oil pricing environment. The Calgary-based oil producer managed to keep its production steady in the fourth quarter of 2018 and kept costs in control at the same time to counter the end-market weakness. Not surprisingly, it will follow a similar strategy in 2019 as well.

Let’s take a closer look at Cardinal’s latest performance and see what’s in store for the company this year.

Keeping a Handle on Costs

Cardinal’s strong full-year performance was driven by an 11% increase in the company’s production to 20,858 BOE/day.

Cardinal’s fourth-quarter production came in at 20,365 barrels of oil equivalent per day (BOE/day), a slight decline from the prior-year period’s output of 20,948 BOE/day. However, low oil prices during the quarter severely impacted its top and bottom lines.

Cardinal’s revenue fell 39% year over year to C$59 million during the quarter. As a result, the company’s operating cash flow and adjusted funds flow from operations shrunk substantially, dropping 71% and 81%, respectively. This was despite the fact that Cardinal’s operating costs increased just 1% during the quarter, and its general and administrative costs fell 43% as the company reduced compensation and other components to counter the volatile pricing environment.

Had it not been for weak oil pricing, Cardinal’s fourth-quarter results would have been as strong as the company’s performance for the full year. The company had delivered a 21% increase in petroleum and natural gas revenue for the full year to C$379.2 million, while operating cash flow increased in the mid-teens and adjusted funds flow rose slightly.

Cardinal’s strong full-year performance was driven by an 11% increase in the company’s production to 20,858 BOE/day, as well as the higher prices it enjoyed earlier in the year. So, it is evident that Cardinal needs strong oil prices to get its financial performance back on track.

What Next for Cardinal?

Cardinal will continue with its cost reduction moves this year. The company’s 2019 plan calls for an 8% reduction in operating costs, as well as a conservative capital plan that will allow it to generate C$90 million to C$100 million in adjusted funds flow.

Cardinal has designed this plan assuming a WTI oil price of $55/barrel, which is good news as the commodity is trading close to $59 a barrel currently. More specifically, the company plans to spend C$47 million as capital expenses this year, which would be in line with what it spent in 2018. This level of capital expenditure will help Cardinal deliver production in the range of 20,400-20,800 BOE/day. The production will be impacted by the government-mandated cuts in Alberta.

What’s more, the company’s operating expenses will remain in line on a year-over-year basis, so any improvement in oil prices will positively impact Cardinal’s performance. The good part is that Western Canadian Select crude oil prices have gained ground in recent months, rising from as low as $10 per barrel in November last year to nearly $50 a barrel now.

But it remains to be seen if the rally can be sustained as the lack of pipeline capacity, and the relaxation of the mandated production cuts in Alberta could lead to higher supply once again and negatively impact prices.

As such, Cardinal Energy investors should keep a close tab on oil prices as an increase in the same could lead to an improved financial performance and stock upside.

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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