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analysis

On today’s Breakouts report, there are five stocks on the positive breakouts list (stocks with positive price momentum), and 88 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that is likely to surface on the negative breakouts list today given the plunge in the price of oil – Surge Energy Inc. (SGY-T).

Year-to-date, Surge is the top performing energy stock in the S&P/TSX Small-Cap Energy Sector with a gain of 88 per cent as of the close on July 11. On June 8, the share price closed at a 2022 high of $13.37. Since then, the stock price has dropped 38 per cent. The share price is nearing oversold territory and may find technical support around $7, which is near its 200-day moving average (at $7.35).

The stock has six buy recommendations and two neutral recommendations. The average target price of $14.81, which implies a potential price return of 79 per cent over the next 12 months.

A brief outline on Surge is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Calgary-based Surge Energy is an oil-weighted producer with operations in Alberta and Saskatchewan. Management targets low risk, conventional reservoirs.

Investment thesis

· The price of oil remains high despite the recent drop.

· Acceleration of cash flow generation as current hedges run off in the second half of 2022. Management indicated in the first-quarter earnings release that “the majority of the company’s mandated fixed price crude oil hedges for 2022 [expire] in less than two months.”

· Focus on lower risk, conventional reservoirs.

· Healthy balance sheet.

· Attractive dividend yield.

· Potential for future dividend increases or special dividends.

· Key potential risks: 1) price of oil continuing to drop; and 2) risk of a recession.

Quarterly earnings

After the market closed on May 5, the company reported its first-quarter financial results. The company drilled 23 wells (21.5 net wells). Average daily production was 20,550 boepd [barrels of oil equivalent per day], up 24 per cent year-over-year. Adjusted funds flow was $62.9-million. Cash flow per share was 75 cents, below the consensus estimate of 78 cents per share. The following day, the share price was relatively unchanged, declining 0.3 per cent.

For 2022, management has guided to a production exit rate of 21,500 boepd. Using a US$85 WTI assumption, cash flow is anticipated to be $3.54. Using a US$90 WTI assumption, cash flow is estimated to be $3.78.

Management currently does not hold quarterly earnings calls.

Dividend policy

On May 5, the company announced its plan to reinstate its monthly dividend payable on July 15. The monthly dividend is set at 3.5 cents per share. Based on an annual dividend of 42 cents per share, this equates to a current yield of over 5 per cent.

Management stated in the release, “On an annualized basis, this base cash dividend is equal to approximately 20 percent of Surge’s previously guided annual 2022 free cash flow utilizing a US$85 WTI [West Texas Intermediate] per bbl [barrel] crude oil pricing assumption.”

In April 2020, management announced the suspension of its dividend in response to uncertainties arising from the COVID pandemic and drop in the price of oil. At the time, the monthly dividend was 0.8333 cents per share and management targeted a payout ratio of between 20 per cent and 30 per cent.

Analysts’ recommendations

There are eight analysts providing recent research coverage on the company, of which six analysts have buy recommendations and two analysts have neutral recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: Acumen Capital, BMO Capital Markets, Cormark Securities, National Bank Financial, Peters & Co., Raymond James, Stifel Canada and Velocity.

Revised recommendations

Since the beginning of June, four analysts have revised their target prices.

· BMO’s Ray Kwan reduced his target price by $2 to $12.

· National Bank Financial’s Dan Payne lifted his target price to $16.50 from $14.50.

· Raymond James’ Jeremy McCrea raised his target price to $15 from $14.

· Stifel’s Robert Fitzmartyn tweaked his target price to $13.25 from $12.75.

Financial forecasts

The consensus cash flow per share estimates are $3.88 for 2022, up from $1.79 reported in 2021, and increasing to $4.43 in 2023.

Financial forecasts have been rising. For instance, four months ago, the consensus cash flow per share estimates were $3.56 for 2022 and $3.69 for 2023.

Valuation

The stock is commonly valued on an enterprise value-to-debt adjusted cash flow basis.

According to Bloomberg, the consensus one-year target price is $14.81, implying the share price may appreciate 79 per cent over the next 12 months. Individual target prices are as follows in numerical order: $12 (from BMO’s Ray Kwan), $13.25, $14.50, two at $15, $16, and two at $16.50 (from Cormark’s Garett Ursu and National Bank Financial’s Dan Payne).

Insider transaction activity

On May 30, senior vice-president of land and business development Margaret sold 20,000 shares at an average price per share of approximately $11.52. This particular account (RRSP) currently holds 10,301 shares.

Prior to that, on May 16, chief operating officer Murray Bye sold 20,000 shares at an average price per share of roughly $10.375, leaving 136,916 shares in this particular account.

Chart watch

Year-to-date, the share price is up 88 per cent, making it the top performing stock in the S&P/TSX SmallCap Energy Sector. However, the share price has been plunging in recent weeks. On June 8, the share price closed at a 2022 high of $13.37. Since then, the stock price has dropped 38 per cent as of the close on July 11.

Despite the recent plunge in the share price, the stock is not yet in oversold territory. The relative strength index (RSI) is at 36. Generally, an RSI reading at or below 30 reflects an oversold condition.

While this negative price momentum remains intact with the price of oil under pressure, buying opportunities may soon emerge. There is strong technical support around $7, near its 200-day moving average at $7.35.

This small-cap stock has reasonable liquidity. The three-month historical daily average trading volume is approximately 1.5-million shares.

ESG Risk Rating

Looking at three risk rating providers, Sustainalytics, MSCI and Bloomberg, the company currently does not have an ESG risk score.

Positive BreakoutsJuly 11 close
CVG-TClairvest Group Inc. $66.10
FRX-TFennec Pharmaceuticals Inc. $8.37
IFC-TIntact Financial Corp $189.59
VMD-TViemed Healthcare Inc. $8.70
WPK-TWinpak Ltd. $45.22
Negative Breakouts
ARE-TAecon Group Inc $12.55
AEM-TAgnico Eagle Mines Ltd $58.41
AC-TAir Canada $15.95
ALS-TAltius Minerals Corp $16.15
AX-UN-TArtis Real Estate Investment Trust $11.32
ATH-TAthabasca Oil Corp $2.09
ABX-TBarrick Gold Corp $22.06
BBD-B-TBombardier Inc $18.43
BBU-UN-TBrookfield Business Partners LP $25.30
CXB-TCalibre Mining Corp. $0.85
CNE-TCanacol Energy Ltd $2.38
GOOS-TCanada Goose Holdings Inc. $22.62
WEED-TCanopy Growth Corp. $3.00
CS-TCapstone Mining Corp $2.70
CIA-TChampion Iron Ltd. $4.21
CHR-TChorus Aviation Inc $3.17
CJR-B-TCorus Entertainment Inc $3.52
DSV-XDiscovery Silver Corp. $1.04
ECO-TEcoSynthetix Inc $4.35
ELD-TEldorado Gold Corp $7.23
EDV-TEndeavour Mining Corp. $25.25
EQX-TEquinox Gold Corp. $5.51
FIL-TFilo Mining Corp. $16.33
FAF-TFire & Flower Holdings Corp. $2.05
FM-TFirst Quantum Minerals Ltd $22.92
FVI-TFortuna Silver Mines Inc $3.39
GIL-TGildan Activewear Inc $35.29
GGD-TGoGold Resources Inc $1.84
GOLD-TGoldMining Inc. $1.15
GRT-UN-TGranite Real Estate Investment Trust $76.30
GRN-TGreenlane Renewables Inc. $0.67
HBM-THudBay Minerals Inc $4.49
IAU-Ti-80 Gold Corp. $2.14
IMG-TIAMGOLD Corp $1.85
IMV-TIMV Inc. $0.77
IVQ-U-TInvesque Inc. $1.18
JAG-TJaguar Mining Inc. $2.66
KNT-TK92 Mining Inc. $7.11
K-TKinross Gold Corp $4.32
LIF-TLabrador Iron Ore Royalty Corp $26.80
LAS-A-TLassonde Industries Inc $112.00
MAG-TMAG Silver Corp $14.23
MND-TMandalay Resources Corp $2.73
MUX-TMcEwen Mining Inc. $0.52
MDF-TMDF Commerce Inc. $1.67
NGD-TNew Gold Inc $1.25
NUAG-TNew Pacific Metals Corp. $3.18
NGT-TNewmont Corp. $76.46
NEXT-TNextSource Materials Inc. $1.84
NOU-XNouveau Monde Graphite Inc. $5.69
NG-TNovagold Resources Inc $5.77
NVEI-TNuvei Corporation $40.96
ORE-TOrezone Gold Corp. $1.22
OLA-TOrla Mining Ltd. $3.32
OSK-TOsisko Mining Inc. $2.67
PAAS-TPan American Silver Corp $24.24
PPTA-TPerpetua Resources Corp. $3.52
PLZ-UN-TPlaza Retail REIT $4.00
PYR-TPyroGenesis Canada Inc. $2.22
QUIS-XQuisitive Technology Solutions Inc. $0.56
RUP-XRupert Resources Ltd. $4.55
SBB-TSabina Gold & Silver Corp $0.94
SSL-TSandstorm Gold Ltd $7.40
SIS-TSavaria Corp $12.83
SEA-TSeabridge Gold Inc $14.81
SMT-TSierra Metals Inc $1.00
SVM-TSilvercorp Metals Inc $3.04
SKE-TSkeena Resources Ltd. $6.34
SOT-UN-TSlate Office REIT $4.48
SLS-TSolaris Resources Inc. $6.61
STLC-TStelco Holdings Inc. $31.54
TECK-B-TTeck Resources Ltd $34.24
TER-CNTerrAscend Corp. $2.84
TH-TTheratechnologies Inc $2.62
TXG-TTorex Gold Resources Inc $8.96
TD-TToronto-Dominion Bank $81.84
TRZ-TTransat AT Inc $3.30
TGL-TTransGlobe Energy Corp $4.11
TSL-TTree Island Steel Ltd. $3.76
TFPM-TTriple Flag Precious Metals Corp. $14.66
TUD-XTudor Gold Corp. $1.15
TRQ-TTurquoise Hill Resources Ltd $32.32
TWC-TTWC Enterprises Ltd. $16.00
FORA-TVerticalScope Holdings Inc. $10.03
VGCX-TVictoria Gold Corp. $9.43
WFC-TWall Financial Corp. $11.00
WPM-TWheaton Precious Metals Corp. $45.22
Y-TYellow Pages Ltd $12.70

Sources: Bloomberg, The Globe and Mail

Please note that this is not an investment recommendation.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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