As Advantage Energy (OTCPK:AAVVF) is one of my favorite gas stocks in Canada, I try to follow the performance of the company closely. I like the high production, low maintenance investments and robust balance sheet. Additionally, the Entropy carbon capture asset is a substantial “hidden asset” on the balance sheet. Like I have discussed the Entropy asset in the previous article, I will focus solely on the performance of natural gas assets in this update. You can read all my older Advantage articles here.
As Advantage is a Canadian company, I would strongly recommend trading the company’s securities using the Canadian listing where Advantage trades with AAV as its ticker symbol on the TSX. Average daily volume is just under 900,000 shares per day. With a current stock count of 189.4 million shares, the market capitalization is C$1.9 billion.
As expected, second quarter results were strong
The asset investments are paying off as Advantage Energy has been able to increase its production rate to just under 60,400 barrels of oil equivalent per day. As you can see in the image below, nearly 90% of oil equivalent production was natural gas. Investors should definitely consider Advantage as a natural gas choice.
Of course, oil and condensate production is also helping, but the very high price of natural gas in the second quarter was obviously the main driver of the average revenue above C$57 per barrel of oil equivalent. Another important element is the great diversification offered by Advantage Energy in terms of the markets in which it sells its natural gas. As you can see below, less than half of natural gas production is sold based on AECO prices, while the United States is also an important market. market for Advantage. Since the price of Canadian natural gas is more volatile than US natural gas prices (as recently as August the AECO price turned negative on a spot price basis), it is good to have this diversification.
Total revenue for the second quarter was just over C$314 million and after taking into account royalty expenses and derivative gains, net income was C$303 million. Operating expenses remain very low at just over C$88 million, of which approximately 40% is represented by depreciation expenses (non-cash).
During the second quarter, Advantage reported net income of C$164 million on EPS of C$0.86 per share. EPS for the first six months of the year amounted to C$0.96 million, mainly due to the hedging loss of more than C$60 million in the first quarter of this year.
The cash flow statement shows that the C$20 million of reported gains actually include approximately C$67 million of unrealized gains. These are again deducted from cash flow and reported operating cash flow in the second quarter was approximately C$157.4 million. We still need to deduct the C$1 million in lease and finance liabilities, but we also need to add the C$29.5 million in working capital investments. This means that the underlying operating cash flow was approximately C$186 million (excluding taxes, as the company has access to C$1.4 billion in tax funds, so it will only pay no significant taxes in the next few years).
The total capex in the second quarter was around C$80 million, but I think it’s more interesting to use the maintenance capex. And according to the company’s presentation, sustaining capital expenditures are approximately C$85 million per year, or just over C$21 million per quarter. Even if we were to use the quarterly average of C$30 million based on sustaining capital expenditures plus “cash-generating infrastructure initiatives”, the second quarter free cash flow result would have been C$156 million or 0 C$.82/share based on an average realized natural gas price of approximately C$6.75 per Mcf.
As the remaining hedge positions (see below) remain strong, we should expect Advantage Energy to continue to report strong cash flow results over the coming quarters.
The strong cash result is helping Advantage to rapidly improve its balance sheet. At the end of June, the company had just under C$46 million in cash on the balance sheet, while total debt decreased to C$122 million, resulting in net debt of less than 100 million Canadian dollars. This allowed Advantage to aggressively buy back shares during the second quarter and I am confident this will add value over the longer term.
I have a long position in Advantage Energy and wouldn’t mind adding to that position on weakness, but I’m in no rush. The third quarter will certainly be worse than the second quarter performance, but the strong balance sheet and low maintenance investments make Advantage Energy quite attractive anyway.