Cardinal Energy stands out in the energy sector for two primary reasons: its attractive dividend yield and its ambitious growth plan. The company pays a monthly dividend of C$0.06 per share, resulting in a yield exceeding 11% at the current share price.
Additionally, Cardinal Energy is executing a growth strategy aimed at increasing production by 6,000 barrels of oil per day.
However, this growth initiative means that the current operating cash flow cannot cover both the dividend and the growth capital expenditures (capex), likely leading to an increase in net debt over the next few years until the new Steam-Assisted Gravity Drainage (SAGD) heavy oil project starts contributing to the bottom line.
Financial Performance and Projections
In the first quarter of this year, Cardinal Energy produced an average of just under 21,700 barrels of oil equivalent per day (boe/day). The majority of this output consisted of liquids, including light and medium oil, as well as natural gas liquids (NGLs).
Natural gas accounted for 12% of the total output but only 2.5% of the revenue, underscoring the importance of oil in the company’s revenue mix.
For Q1 2024, Cardinal Energy reported total revenue of C$140.2 million before royalty payments. After accounting for royalties and including processing revenue, the net revenue was C$114.6 million, marking a 4% increase compared to the same quarter last year.
Despite an increase in operating expenses, the company reported a net profit of C$16.8 million or C$0.11 per share.
The cash flow statement is particularly revealing. The reported operating cash flow was C$39.4 million, including a C$9.1 million working capital investment but excluding C$0.3 million in lease liabilities.
This means the adjusted operating cash flow was approximately C$48.2 million. The total capex for the quarter was just over C$49 million, more than twice the capex spent in the first quarter of the previous year.
This is because the company’s annual maintenance capex is around C$100 million, and it has budgeted C$69 million for the SAGD growth project.
Growth Initiatives
Cardinal Energy’s growth strategy focuses on the new SAGD project, which is expected to start producing heavy oil by 2026. The project’s economics are promising, with an expected internal rate of return (IRR) of 53% based on an oil price of $80 per barrel and an anticipated production rate of 6,000 barrels of oil per day.
The company has also identified a second SAGD project with similar output and economics, planned to start construction once the first project is operational.
The pro forma calculation provided by Cardinal Energy indicates that if both SAGD projects are in production, the company’s output would be 34,500 boe/day.
This would generate approximately C$510 million in adjusted funds flow at an oil price of $79 per barrel, with a total free cash flow of around C$254 million, inclusive of anticipated dividend payments.
Financial Health
Cardinal Energy has reduced its net debt to C$87 million, excluding decommissioning obligations, with a working capital deficit of approximately C$42 million.
The balance sheet is in relatively good shape, and the Q2 cash flow is expected to be strong, with pre-ARO operating cash flow likely exceeding C$60 million.
Dividend and Shareholder Returns
Cardinal Energy’s monthly dividend of C$0.06 per share translates to an annual yield of over 11%. Despite the attractive dividend, the company’s growth plans mean that the dividend and growth capex cannot both be covered by current cash flows.
One potential strategy could be to reduce the dividend to C$0.04 per month, which would still provide a yield of over 7.3% and free up an additional C$38 million annually for growth initiatives.
Investment Thesis
Cardinal Energy presents a compelling investment opportunity due to its combination of high dividend yield and growth potential. The company’s strategic focus on expanding its production through new SAGD projects, coupled with a solid balance sheet and strong cash flow projections, positions it well for future growth.
The attractive dividend yield provides income to shareholders, while the growth initiatives promise significant long-term value. Reducing the dividend slightly to fund growth could enhance the company’s financial flexibility and ensure sustainable development.
Overall, Cardinal Energy offers a balanced approach to income and growth, making it a noteworthy consideration for investors.
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Kevin is an experienced business development strategist and content writer specializing in finance and stock market topics. He has a proven track record of driving sales and enhancing communications for small businesses by blending academic knowledge with practical experience to create engaging and accurate content.
