Will Weak Oil Prices Derail TORC Oil and Gas’ Growth in 2019?

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TORC Oil and Gas () recently released its fiscal fourth quarter and full year 2018 results. The company’s production increased substantially, allowing it to offset the weakness in oil prices during the final quarter of 2018 to some extent.

Investors initially greeted TORC’s results positively as the post-earnings spike in its share price shows. Let’s take a closer look at how TORC performed and what investors can expect from the company in 2019.

Q4: Improved Production Nullified by Low Oil Prices

TORC’s fourth-quarter production came in at 28,163 barrels of oil equivalent (BOE) per day, up nearly 29% from the prior-year period. For the full year, TORC’s production averaged 25,339 BOE/day as compared to 20,871 BOE/day in 2017. Liquids accounted for 89% of the company’s production.

However, the steep drop in oil prices negatively impacted TORC’s quarterly results. Edmonton Par crude oil prices declined from C$68.95 per barrel in the prior year period to C$42.81 per barrel during the fourth quarter. However, West Texas Intermediate (WTI) crude oil prices increased slightly on a year over year basis to $58.83 per barrel.

The company can command a premium for its oil as compared to the Edmonton Par prices.

TORC sells its crude oil at Cromer after producing the same in Southeast Saskatchewan, so the company can command a premium for its oil as compared to the Edmonton Par prices. As a result, its average realized price of oil per barrel came in at C$46.26 per barrel as compared to C$56.49 per barrel during the year-ago period.

But this 18% decline in the price was enough to hurt the company’s top line growth during the quarter. TORC delivered fourth-quarter revenue of C$119.9 million, an increase of just 5% from last year. However, investors are willing to overlook that shallow growth as TORC plans to increase its production once again this year, but is that a good idea?

What’s in Store for 2019?

TORC is looking to play it safe this year in light of the uncertain oil pricing environment.

TORC expects to produce 28,000 barrels of oil equivalent per day in 2019, an increase of 10% from the prior year. That might not sound like a major increase when compared to the company’s 2018 performance, but TORC is looking to play it safe this year in light of the uncertain oil pricing environment.

The company will spend C$180 million on capital expenditure in 2019 as compared to C$165 million last year, though it has informed investors that it plans to raise the outlay in case oil prices keep rising. The good news is that the WTI oil price has shot up over 21% so far in 2019 to more than $56 a barrel, driven by production cuts by OPEC and a surprise decline in U.S. oil inventories.

The Energy Information Administration expects WTI crude oil prices to end 2019 at $57 per barrel, which is roughly equal to the current price level. But TORC witnessed an average WTI price of $64.78 per barrel last year, up from $50.94 a barrel in 2017. That allowed the company to increase its full-year revenue by almost 46% from the previous year.

But with WTI oil expected to clock an average price that’s far lower than last year’s levels and production to increase just 10%, TORC might not be able to replicate 2018’s terrific growth in 2019. That’s probably why analysts expect the company to report flat revenue growth this year. And in case oil prices go south once again, TORC’s stock price will take a hit.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
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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