Perpetual Energy (PMT) is a small-cap producer focused on diverse Cretaceous and Devonian aged reservoirs, and the company has various operating activities consisting of tight shallow gas as well as conventional light and heavy oil. After looking at its most promising assets, a look at its core financials will allow us to determine if this producer is in good financial health and appraise its true value.
Perpetual Energy is a company headquartered in Calgary, Alberta. Through the declining gas price environment, Perpetual has made a smooth and calculated transition to a more diversified growth-oriented company, as its liquids assets now account for about 40% of the production.
Asset base in prominent resource plays
Perpetual has competitive operating costs and its combination of access to markets and to the producing properties are delivering relatively high operating netbacks. This extensive inventory of low-cost opportunities for value creation could change the very face of the company. Perpetual's assets are divided in two districts, the Eastern District and the West Central District.
Source: TD Calgary Energy Conference Presentation, June 2013
Operating highlights
The company reported that its liquids production rose to 4,384 barrels per day, 27% higher than in the second quarter of 2012. Furthermore, it represented 22% of the company's total quarterly production, up from 16% in the prior year's quarter. Regarding its natural gas production, it decreased by 13% at 91.9 million cubic feet per day when compared to Q2 of 2012, directly attributable to the company's shift toward liquids. In all, Perpetual reported an increase of 6% from Q1 of 2013 with an average production of 23,725 barrels of oil equivalent per day for Q2, but it nevertheless represented a drop of 7% over Q2 of 2012, due to assets divestitures.
According to its Q2 of 2013 results, cash flow of $17.3 million increased 36% from last year's Q2 and 81% from Q1 of 2013. Perpetual's operating netbacks increased 14% over Q2 of 2012 with $14.81/Boe. The increase is attributable to stronger realized natural gas prices combined with an increase in netbacks from its oil and NGL properties.
Comparing the netbacks with its peers, we can see that Peyto Exploration and Development (PEY 1.76%) reported an average netback of $20.82/Boe in Q2, Advantage Oil & Gas' (NYSE: AAV) Q2 netback totaled $14.74/Boe, Baytex has realized $25.76/Boe for Q1 and Bonavista Energy's netback for Q1 amounted to $19.49/Boe. Therefore, with an average netback of $20.20/Boe, Perpetual's $14.81/Boe is lower than the average of its peers but is comparable to Advantage.
Its total long-term debt amounted to $461.57 million, as of September 11, 2013. The current LT debt to equity ratio is at a whopping 466.17 compared to its industry's average of 73.08. Perpetual's management needs to address its huge debt ratio by being more efficient in using its capital financing. It will need to strengthen its balance sheet by strategically divest some non-core assets.
Peer comparison
To have a good idea of the company's valuation, I looked into its EV/EBITDA (trailing twelve months) multiple compared to its peer group. The chart below shows that Perpetual trades slightly at a discount with a multiple of 30.31x when compared to the peer group average of 30.73x.
However, it also shows that Peyto's valuation is way above the market valuation of its peer group and Perpetual trades at a premium over the rest of the peer group.
Peyto Exploration and Development is a pure unconventional tight gas company that owns 624 net sections of land in Notikewin, Falher, Bluesky and Wilrich formations. Only 8% of the land is being currently developed. Furthermore, 176 net sections have been evaluated to hold 1.9Tcfe of proved developed, ultimate recoverable resources for 2012 year's end.
As for Advantage Oil and Gas, production is averaging 23,000Boe/d, weighted 94% to natural gas and 6% to liquids. Advantage owns 77 net sections in Glacier, Alberta, focused in the Montney Formation. These sections are believed to hold contingent resources of about 3.54Tcf.
Bottom line
According to an independent evaluation, Perpetual's proved plus probable reserves were estimated at 75.05Mmboe or 372Bcfe for the end of 2012, with a reserve life index of 11 years. Notably, the contingent resource of bitumen was estimated at 279Mmbbls.
As we can see, the value potential for growth is there. The producer is developing several assets that should generate substantial cash flow, thereby driving the stock higher in the foreseeable future.
