Bellatrix (BXE) - a gas E&P with a new management

Date of analysis: 29/12/2017

Price: CAD 2,17$ 

Nb of shares: 49 378 026 M (57,21M diluted but exercise price are between CAD 3,85 and CAD 50)

Market cap: CAD 107,15M$

Net Debt: CAD 400M$

EV: 400+107,2 = CAD 507,2M$

Operations

I got the idea of studying this company thanks to this forum message.Bellatrix is a Canadian gas producer with assets mainly in Alberta. A new president and CEO, and CFO have been appointed at the beginning of 2017. This management wants to focus on growing production, and reduce costs while divesting non strategic assets (probably to finance growth and/or reduce debt).Under the previous management, there was a lot of value destruction due to acquisitions at high costs and no profitability at current low gas prices.For Q3 2017, here is a comparison of the cash costs between Bellatrix and Peyto (the local low cost producer with AAV):

(en CAD$/mcfe)      Peyto |  BXE
Royalty                    0,09    | 0,31
Opex                        0,26    | 0,75
Transport                 0,17    | 0,28
G&A                        0,03    | 0,34
Interest                     0,21    | 0,47
Total cash costs       0,76    | 2,15


Cash costs are 0,76 CAD for Peyto against 2,15 CAD for BXE. Some remarks about BXE costs:

• According to management, opex cost 2018 should decline by CAD $1/BOE (CAD $0,167/mcfe) thanks to the newly built factory entering into production in mid 2018;

• They bought excess transport capacity before delays with the new factory. Therefore, they still have to pay for the excess capacity, but this cost should diminish when production ramps up. However, with a guidance for flat production for 2018, transportation costs would not improve till 2019;

• Interest costs could be lower if there are asset sales and/or profitability by 2020 when debt starts to expire (most of the debt matures in 2020 and 2021);

• G&A costs are really high and could be due to the lack of scale and/or overpaid management.

We need to add the PDP FD&A costs to the cash in order to determine the total costs. For Peyto, we have CAD $1,44/mcfe against CAD $0,98/mcfe for BXE. Therefore, I estimate that the total costs for Bellatrix in 2018 would be:

Royalty        0,31
Opex           0,58
Transport     0,28
G&A            0,34
Interest       0,47
PDP FD&A 0,98
Total            2,96

It means that BXE must sell gas, including hedges, at CAD$2,96/mcfe to be break even and maintain the current production. These costs could go down in 2019 and 2020 if excess capacity is being utilised, but for this, capex must be spent to increase production, and at these current prices (CAD$2/mcfe), BXE does not have a lot of room to increase production.Therefore, BXE is for me a bet on the raising gas prices in the next two years.

Thanks to the heat content, BXE can sell its gas at a price slightly above the hubs prices, so it is for Peyto (thanks to NGL and owned facilities).

Valuation

On the valuation side, BXE is priced at an EV of CAD 507M$ with only CAD 107M$ of equity.
Current production and forecast production for 2018 are at about 36 500 boe/d. If gas prices stay below CAD$2/mcfe, BXE can' t make any maney even taking into account hedges and superior heat content of the gas. However, if, with help of gas price improving, BXE could sell gas at CAD 4$/mcfe, with the same cost structure (which is not obvious as costs rise when gas prices rise), BXE could make 36500 * 6 * 365 * 1$ (profit per Mcfe) = CAD 80M$, i.e almost the whole current market capitalisation, which could then reach 800 M$. Therefore, the valuation depends a lot of the gas price and I prefer to stay away in order to sleep well if the gas prices stay below or around CAD 2$/mcfe. Both upside and downside are important.
The NAV given in the 2016 reserve report indicate 25CAD/share (after taking into account the reverse split of 5 to 1), but it is based on gas prices well above the current prices and reflects the fact that BXE really needs higher gas prices.