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Why Bellatrix Exploration may still be a bargain despite stock’s runup

Investors have not yet fully bought into Bellatrix Exploration Ltd.'s growth story.

While the resurgent oil patch has drawn much attention of late, the market is discounting Bellatrix stock relative to its peers, despite the company's superior oil and gas production growth and clean balance sheet, said Mason Granger, a fund manager at Sentry Investments, which owns shares of Bellatrix.

"You'd be hard pressed to find other companies that can demonstrate production growth on a per-share basis of 30 per cent or more," he said. "But it's not a wildly expensive stock where you have to pay for that growth."

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The modest valuation may reflect lingering doubts about the company's ability to scale up. But those touting the stock say that uncertainty is more than offset by the quality of Bellatrix's assets, and the way in which the company is managing to grow quickly with less risk.

Bellatrix is the next incarnation of True Energy Trust, which proved to be a dud, losing almost $400-million between 2005 and 2009 before killing its dividend and retooling.

New management then came in, replaced staff, divested assets, reduced debt and refocused on the company's promising assets, which include the Cardium and Notikewin formations of West Central Alberta.

To develop those plays more quickly without loading up on debt, Bellatrix has signed a number of joint venture agreements over the past couple of years.

"If you've got a ton of inventory, it makes sense to bring in capital from external sources to accelerate the present value of that inventory," Mr. Granger said. "A well you're not going to be able to drill for 10 years, if you can get somebody else to help pay to drill it now, it adds value."

Through these agreements, as well as the $576-million acquisition of Angle Energy Inc., announced last October, Bellatrix has been able to increase production dramatically.

In 2012, the company's output averaged about 17,000 barrels of oil equivalent a day, which rose to about 22,000 last year. This year, the company is expected to produce up to an average of 43,000 boe/d.

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"The existing agreements have been considerable wins in our opinion, allowing Bellatrix to exploit its decades-plus inventory, materially improve its already peer-leading capital efficiencies and bring value forward to the benefit of shareholders," Dundee Capital Markets analyst Brian Kristjansen said in a recent note.

Meanwhile, the company has reasonable levels of net debt at 0.9 times trailing cash flow, said Mr. Kristjansen, who rates the stock a "top pick" with a share price target of $19, representing almost an 80-per-cent premium over Thursday's closing stock price of $10.65.

Of the other 12 analysts covering Bellatrix stock, 11 rate it a "buy," while just one has a "hold," at an average target price of $13.60, according to Bloomberg data.

There is certainly a good deal of production growth reflected in the stock, which has quadrupled since June, 2012, and is up by 37 per cent year to date.

But even that run has left Bellatrix stock at a reasonable valuation compared with its peers. The stock currently trades at about 4.5 times enterprise value to debt-adjusted cash flow, a closely watched metric in the energy sector.

"For a high growth company, you'd expect six or seven times," Mr. Granger said.

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Any investor reluctance may be related to production delays, of which Bellatrix has had its share, in addition to bottlenecks as a result of limited pipeline capacity.

"There's some question about their ability to execute and I think the market discounts that a little bit," said Dariusz Nieciecki, a managing partner at Red Sky Capital. "But it's still a great value given its performance."

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About the Author
Investing reporter

Tim Shufelt joined the Globe and Mail in August, 2013, primarily to cover investments for Report on Business. Prior to the Globe, he worked as a staff writer at Canadian Business magazine, a business reporter at the Financial Post, and covered city news and courts for the Ottawa Citizen. More

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