A Weak Balance Sheet Is One of Many Problems Faced by Bonavista Energy

Bonavista Energy [stock_market_widget type="inline" template="generic" color="default" assets="BNP.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has been hammered in 2019, losing 55% of its value after a steady start. Much of the crash has happened in the past three months once oil prices started going lower, and that’s not surprising as the weakness in pricing has caused a massive dent in Bonavista’s financial fortunes.

A Weak Second Quarter Exposes Bonavista’s Problems

In the second quarter of fiscal 2019, Bonavista reported a 33% decline in its revenue to $81.5 million. Its operating cash flow plunged 16% to $0.21 per share in the quarter, while adjusted funds flow per share dropped 40% year over year to $0.15 per share.

Bonavista’s weak quarterly performance was a result of two factors: lower prices and weaker output. The company total oil equivalent production fell 10% annually during the quarter 61,186 boe/day. The company’s average realized price per barrel also declined to $17.36 per barrel of oil equivalent as compared to $21.16 per boe in the prior-year period, representing a drop of 18%.

So, it is not surprising to see why investors have shunned Bonavista stock as the company has not been able to offset the weak oil pricing scenario with higher production. That’s because Bonavista’s balance sheet is laden with debt. The company is sitting on nearly C$770 million of debt, while its cash position is extremely thin.

As such, Bonavista cannot take on more debt to fund its growth. Moroever, the decline in the funds flow shows that the company isn’t being able to sustain its production by remaining within its means.

What Next for Bonavista?

The Calgary-based oil producer has been hamstrung by the lack of oil pipeline capacity in Canada. This was clearly stated in the company’s press release:

Inadequate pipeline capacity and regulatory uncertainty in the Canadian energy sector continues to overshadow the operational success we have experienced as a sector, in the first six months of the year.

So one of the ways Bonavista’s performance could improve is if its access to the market improves, especially in natural gas. The good news for Bonavista is that there might be some relief on this front as Enbridge has decided to bring the Line 3 replacement pipeline in Canada online by the end of the year.

But whether that will be enough to lift Canadian natural gas prices remains to be seen as oversupply persists in the country. According to a report:

In March 2013, Canada produced about 14 billion cubic feet per day of natural gas. Six years later, the National Energy Board reports production had increased by 16 per cent to 16.2 billion cf/d, despite no rise in pricing trends.

This indicates that the continuous increase in natural gas output in Canada has kept prices under pressure. As such, expecting a turnaround at Bonavista in the near-term doesn’t look like a prudent idea as the company’s debt-laden balance sheet and the end-market uncertainty make it a risky bet.

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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