The Bottom Line:
- TORC Oil and Gas’ (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”TOG.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) 2019 capital budget has been made, keeping the oil price uncertainty in mind so that it can maintain its production profile and boost cash flow.
- The company will be investing in lower risk, light oil production opportunities this year that can deliver a higher rate of return.
- TORC will spend nearly 75% of its capital expenditures on drilling, completions and tie-ins, and the remaining will be spent on optimizing its operations and facilities to boost production efficiency.
TORC (TOG) 2019 Guidance:
- TORC expects to spend $180 million in the form of capital expenditure this year, an increase over the $165 million budget it had in 2018.
- The company’s 2019 capital expenses are expected to help it achieve an average and exit production rate of 28,000 barrels of oil equivalent per day while maintaining an average decline profile of 23%.
- The company is yet to release its full-year 2018 results, which are expected in the last week of February or early March. Still, it is notable that the 2019 capital expense and production numbers are an upgrade over last year when TORC spent $165 million to maintain average annual production of 23,000 barrels of oil equivalent per day.
- TORC plans on drilling 45 gross and 33.7 net conventional wells this year in Southeast Saskatchewan. The company believes that it can achieve high rates of returns from these wells at a lower risk thanks to high netbacks, low capital costs, and attractive royalties in Saskatchewan.
- The company also plans to drill 9 gross and 8.2 net wells in the Cardium area this year. The low decline nature of the Cardium wells means that they are capable of generating free cash flow even in an uncertain oil pricing environment.
- TORC produces 85% of its crude oil in southeast Saskatchewan. It is exempt from the Alberta government’s mandated production cuts as its oil production from that province is less than 10,000 barrels per day.
- TORC plans on altering its 2019 budget to boost growth in case there is an improvement in the oil pricing scenario.
Our Take:
- TORC shares have lost a fifth of their value over the past year on account of lower oil prices, but the scenario has improved in 2019 thanks to supply actions being undertaken by the likes of OPEC.
- An improvement in oil prices should help TORC improve its top and bottom lines thanks to the higher production that it is planning this year.
- The company might boost its production beyond forecasted levels if oil prices keep improving, but it might have to pull back on spending in case things go south.
- TORC’s balance sheet is laden with net debt of $391 million and its cash position is quite thin. So, lower oil prices will negatively impact the company’s cash flow profile and force it to lower the capital spend, otherwise, it will have to take on more debt to fund its 2019 plans.
