On today’s Breakouts report, there are 82 stocks on the positive breakouts list (stocks with positive price momentum), and nine securities are on the negative breakouts list (stocks with negative price momentum).
Energy stocks dominate the positive breakouts list, accounting for roughly one-third of the stocks on the list. Discussed today is an energy stock on the positive breakouts list that has one of the highest forecast returns by analysts - Tamarack Valley Energy Ltd. (TVE-T).
Tamarack is a top-performing stock in the S&P/TSX Small Cap Index. The share price has more than doubled in value, delivering a 120 per cent year-to-date gain.
Despite this remarkable rally, analysts believe the share price has a further 33-per-cent upside potential over the next year. This small-cap stock has a large number of buy recommendations – 13 buy calls.
Management is forecasting robust production and free cash flow growth. Furthermore, the company has a healthy balance sheet with undrawn credit facilities in order to support management’s growth objectives.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Calgary-based Tamarack is an oil-weighted producer with operations in Alberta and Saskatchewan.
On June 1, the company announced positive news - the closing of its previously announced acquisition of Anegada Oil Corp., a Charlie Lake light oil producer. This acquisition will provide the company with an attractive pipeline for future growth with over 240 net future drilling locations.
Management is targeting average production of roughly 39,000 barrels of oil equivalent per day (boe/d) in the second half of 2021, of which between 70 per cent and 72 per cent of production will be oil and NGL (natural gas liquids). For 2021, management expects the company’s oil and NGL weighting will be between 67 per cent and 69 per cent and average annual production is anticipated to come in at 33,000 boe/d in 2021. Free adjusted funds flow is forecast to be between $120-million and $125-million in 2021. Management raised its capital budget for the year to between $165-million and $180-million.
In September of 2018, the company was added to the S&P/TSX composite index, increasing the stock’s visibility and attracting new investors, but when its share price plunged along with the price of oil, the stock was removed from the S&P/TSX composite index. The stock could return to the S&P/TSX composite index if the share price continues to recover.
Investment thesis
- Rising price of oil with strong demand driven by rebounding economic growth.
- Growth. Attractive growth profile with rising production and cash flow.
- High quality, long-life assets in the Western Canadian Sedimentary Basin with paybacks of less than 1.5 years.
- Low cost producer.
- Healthy balance sheet and undrawn credit facilities to fund its growth. Management targets debt-to-cash flow of less than 1.2 times by year-end.
- Strategic acquisition growth.
Quarterly earnings results
On May 4, the company reported solid first-quarter financial results. The company realized production volumes of 23,938 boe/d, up 2 per cent year-over-year. Cash flow per share came in at 16 cents, relatively in-line with the Street’s forecast. Exploration and development capital spending totaled $48.7-million in the quarter with 44 wells drilled (42 net).
In the earnings release, founder, president, and chief executive officer Brian Schmidt said: ”We are proud to report another very strong quarter driven by the effective execution of our drilling program and integration of the Clearwater acquisitions. The company exceeded our Clearwater winter drilling program exit production expectations with volumes greater than 4,000 barrels per day. Furthermore, we continued to deliver on our strategy of enhancing the sustainability and resilience of our free adjusted funds flow with the closing of the Greater Nipisi and Provost acquisitions on March 25th, which added approximately 2,800 boe/d of low decline oil production under waterflood and grew our highly economic Clearwater oil inventory. These transactions, combined with our recently announced Anegada Oil Corp. acquisition continue to drive down our sustaining free adjusted funds flow breakeven price to the mid U.S.$30 per barrel, while offering significant upside to shareholders through a sector leading total return profile.”
Management has tentatively scheduled its second-quarter earnings release date for July 27. The Street is forecasting cash flow per share to come in at 16 cents in the second quarter.
Dividend policy
The company currently does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap stock is well-covered by the Street with 15 analysts actively covering the company. The stock has 13 buy recommendations and two neutral recommendations (from BMO Nesbitt Burns’ Ray Kwan, and Canaccord Genuity’s Anthony Petrucci).
Revised recommendations
Since the beginning of May, nine analysts raised their target price expectations.
- Acumen Capital’s Trevor Reynolds by 25 cents to $3.75.
- Canaccord Genuity’s Anthony Petrucci to $2.75 from $2.50.
- Cormark Securities’ Garett Ursu by 50 cents to $3.50.
- Desjardins Securities’ Christopher Macculloch to $4 from $3.75.
- Eight Capital’s Phil Skolnick to $4.25 from $3.50.
- IA Capital Markets’ Elias Foscolos to $3.50 from $3.
- Peters & Co.’s Dan Grager by 50 cents to $4.
- Raymond James’ Jeremy McCrea to $4.25 from $4.
- Stifel Canada’s Cody Kwongto $4.50 (the high on the Street) from $4.
Financial forecasts
The Street is forecasting cash flow per share of 81 cents in 2021, rising over 20 per cent to 97 cents in 2022.
Earnings expectations have been rising. To illustrate, four months ago, the consensus cash flow per share estimates were 57 cents for 2021 and 75 cents for 2022.
Valuation
Many analysts evaluate the stock on an enterprise value-to-debt adjusted cash flow multiple basis.
The average one-year target price is $3.72, suggesting there is 33-per-cent potential upside in the share price over the next 12 months. Individual target prices are: two at $2.75 (from BMO’s’ Ray Kwan and Canaccord’s Anthony Petrucci), $3.25, three at $3.50, $3.75, $3.85, four at $4, two at $4.25, and $4.50 (rom Stifel Canada’s Cody Kwong).
Chart watch
Year-to-date, Tamarack Valley Energy is the sixth best performing stock in the S&P/TSX Small Cap energy sector index with a price return of 120 per cent. Despite the stock’s spectacular gain, the positive price momentum remains intact. On June 1, the share price appreciated 5 per cent on very high volume with over 9.3-million shares traded. The three-month daily average trading volume is approximately 5million shares.
Looking at key technical resistance and support levels, the share price is approaching initial resistance at around $3. After that there is a ceiling of resistance around $4, and then around $5. On a pullback, the stock price has strong technical support around $2.50, close to its 50-day moving average (at $2.42). Failing that, there is technical support around $2.
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 indexes 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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Jennifer Dowty