All figures are in CAD unless otherwise stated.
Journey Energy Inc. (OTCQX:JRNGF) is an Albert, Canada-based energy company with operations in exploration & production and power generation.
As of q2’23, Journey Energy’s asset base includes 81mmboe of proved and probable reserves valued at $894.9mm under PV-10. 44% of these assets are oil reserves with the remaining split between natural gas and NGLs. Journey Energy also owns 100% working interest in the Countess Power Plant. The plant currently generates 4MW of electricity generated using fuel gas. Journey Energy began to further enhance its power generation business with the acquisition of a 16.5MW power plant in Mazeppa on April 28, 2023, with plans to reactivate it and reconnect the facility to the power grid. Given some near-term challenges faced by higher operating costs and potentially higher capital investment resulting from acquiring the Mazeppa power plant, I provide JRNGF shares a SELL recommendation with a price target of $2.39/share and -32% downside risk.
Before I dig through operations, I want to touch up on the Mazeppa power plant acquisition. In their investor presentation, Journey discloses that the plant was commissioned in 2015 and ran for less than a year prior to retirement. Though my search may be falling short, I cannot find any resources relating to a 16.5MW power plant commissioned in Alberta in 2015. The only resource I could find on a gas-fired power plant in the region was owned by Lexin Resources. The plant was said to have been commissioned in 1986, faced challenges throughout 2015, and was forced to shut down by regulators in 2016 due to contract breaches, leaving a significant amount of waste behind. The plant was forced into receivership in 2017. Because Journey Energy does not disclose the seller in their reports, it will be challenging to find out more information relating to the plant. According to MarketScreener, Journey Energy acquired the plant at a low cost of $5.3mm. Given the price of the acquisition, I suspect these are the same plants and may result in Journey Energy experiencing higher capital investments to bring the plant back online.
Journey Energy produced 12.4mboe/d during the second quarter of 2023, or -4% lower sequentially. Journey Energy did experience some exogenous effects to operations as a result of wildfires in Central Alberta, resulting in a loss of 185boe/d, 3rd party turnaround at the Keyera Rimbey facility resulting in a loss of 85boe/d, a pipeline outage resulting in a loss of 100boe/d, and the shut-in of the CNRL Kishu production for a loss of 185boe/d.
Management updated their FY23 guidance in August to reflect reduced production volumes of 12-12.5mboe/d, down from 12.5-13mboe/d with adjusted fund flows adjusting down to $64-67mm from $75-78mm. Despite the downward revision, volumes are significantly higher on a year-over-year basis, increasing by 40% for the first 6 months.
Despite higher volumes, Journey Energy experienced some significant headwinds relating to commodity pricing in the second quarter of 2023, resulting in a TTM -6% decline in O&G sales.
Much of this pressure derived from natural gas, declining -19% on a trailing basis as the price per Btu hit its low point in CY23 at around $2.011/mcf during the quarter. I will note that these challenging comps are not isolated to Journey Energy and should not be considered a determining factor in valuing the firm given the commodity price increases resulting from the implementation of an embargo on a major oil-producing nation.
Despite the challenging comps in the commodities market, Journey Energy did experience a significant increase in operating expenses, primarily from their field operations and DD&A, both increasing from the previous year by 60% and 70%, respectively.
Sequentially, the average selling price for oil, natural gas, and NGLs declined by -5% between q1/q2’23. In combination with a more challenging commodities market and higher operating expenses, margins were challenged, resulting in a $20mm hit to EBITDA and a decline in margin from 49% to 42% for q1’23 and q2’23, respectively, on a trailing basis. On a non-seasonally adjusted basis, the EBITDA margin for q2’23 dropped to 28% off of 59% in q2’22, resulting in a -62% decline. This trickled into their first quarterly net loss since q2’21.
Journey Energy currently holds $118mm on and off its balance sheet with an effective rate of 10.6%. Through a deal with their creditor AIMCo, Journey Energy has three remaining tranches of term loans due in 2024. As of q2’23, the firm has $24.7mm due on April 30, 2024, and a combination of $19mm due on October 31, 2024. Journey Energy also has $31mm in the form of a guaranteed vendor-take-back (VTB) that amortizes monthly based on the price of oil and bears a rate of 10%.
Considering their operations in q2’23, if these figures were to hold through the term of their tranche loans, Journey Energy would have a 1.36x DSCR and should be able to cover all costs at maturity.
JRNGF currently trades at 4.86x EV/EBITDA, a premium to its peer group in the Alberta region. Using a cohort of Alberta producers, I created an average target multiple weighted based on the size of the firm. In the valuation table below, I provide both the average multiple and the weighted average multiple for comparison purposes. Using the weighted average multiple, I provide JRNGF a SELL recommendation with a price target of $2.39/share, resulting in a -32% downside risk.
There are other challenges involved worth mentioning in this sell recommendation, including the necessity for increased investment in their power generation business, higher associated opex costs, and their high cost of debt with their unique tranches and VTB vehicle.
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