TransGlobe Energy: Small Cap Oil Producer Will Outperform Peers, Large Caps (NASDAQ:TGA)

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Even with increasing political pressure in the U.S. and elsewhere around the world to alleviate the pain in the pump for consumers, we expect crude oil prices to remain high during the second half of 2022. Crude supply is very restricted. and there is little that can be done to resolve this in the short and medium term, given the underlying reasons for the supply crisis.

Thanks to the reduction in capital expenditures among oil and gas exploration and production companies over the past decade, the world has a limited spare oil production capacity. This means that an additional supply cannot be introduced at a pace and scale that could bring global prices down significantly. Geopolitical advances are also altering supply in key markets such as Europe, where the EU has decided to cut 90% of Russian imports by the end of the year due to its invasion of Ukraine.

In terms of demand, the prospect of a recovery in China, the world’s second largest economy after the United States, is fueling bets that oil prices will rise further. China is at a key juncture in turning its economy around. A flow of monetary and fiscal policy measures in recent weeks, synchronized with the easing of COVID-19 blockades in large cities, has provided catalysts for a turnaround.

Go with small scap games

As crude oil prices are likely to remain high, the current rise in oil exploration and production stocks will continue unabated. For investors looking for disproportionate gains so far in the megatrend, small-cap stocks (between $ 300 and $ 2 billion in market capitalization) may offer a better opportunity relative to megacaps.

One of the small capital oil stocks worth considering is TransGlobe Energy Corporation (NASDAQ: TGA), an oil and gas producer based in Canada and with operations in both Canada and Egypt. TGA’s focus is primarily on terrestrial oil fields. It owns 100% of the work stakes in four joint production concessions in Egypt and assets of high labor interest in the Harmattan area of ​​western Canada.

In the last year, TGA has surpassed most of the major holdings that have dominated the headlines: Exxon Mobil Corporation (XOM), Chevron (CVX) and Occidental (OXY).

1-year TGA yield vs. higher oil prices

1-year TGA yield vs. higher oil prices (Searching for alpha)

TGA’s strong performance is likely to continue for two reasons. The first and obvious is the current environment of the price of crude oil that has boosted oil and gas stocks in every way. The second is the fact that, compared to similarly sized oil producers, TGA has the best performance where it matters most: cash generation, debt reduction, and cash return to shareholders.

TGA is the best in its set of equals

TGA’s partners include Amplify Energy Corp (AMPY), a Texas-based producer, Bonterra Energy Corp (OTCPK: BNEFF), a Canadian-based play, and VAALCO Energy (EGY), also based in Canada. The following table provides some highlights of how these companies compare to each other in key metrics (Seeking Alpha data)










Income [TTM]

$ 203.91 million

$ 357.68 M

$ 209.78 million

$ 227.96 million

Market leader

$ 350 M

$ 341 million

$ 363 M

$ 469 million

Business value

$ 317 million

$ 553 million

$ 547 million

$ 459 million

Total cash (Mrq)

$ 37.25 million

$ 15.61 million

$ 205.57

$ 18.94 million

Total debt (Mrq)

$ 3.87 million

$ 228.3 million

$ 187.85 million

$ 8.64 million

In cyclical sectors such as oil and gas, a crucial test of the skill of a management team is the efficiency with which it generates cash at favorable price times and how wisely it deploys that cash to create value for shareholders. If you compare TGA with your peers in this metric, you have the best performance despite having the lowest income for the next twelve months.

TGA also generates more profits from its assets compared to its peers. TGA’s total return on capital is the highest of its peer set at 39.9%, significantly higher than BNEFF (24.77%), EGY (26.52%) and AMPY (-31.43%) with losses. Return on capital tells you how much profit a company generates for every $ 1 of capital employed.

It is important to note that TGA is using the cash it generates to increase shareholder value. One way to do this is to drastically reduce your debt. It has the lowest debt of its peers, which is very advantageous as we enter a global economic cycle that will be marked by higher interest rates. In addition to paying off its debt, TGA has also significantly increased dividends. In March, it declared a dividend of $ 0.10 per share, 185% more than the $ 0.035 per share it paid in 2019.

In view of the improvement in its cash position and strong balance sheet, TGA has adopted a distribution policy to allocate a minimum of 75% of its annual free cash flow to its shareholders through dividends and share repurchases.

One year performance of TGA vs set of equals

One year performance of TGA vs set of equals (Searching for alpha)

If you look at the TGA, AMPY and EGY stock charts, you can see that they have all risen together over the last year at the same time as the rise in crude oil prices. While we expect all of these stocks to continue to benefit from high crude oil prices, we expect a divergence in performance between TGA and its partners based on the company’s better cash generation, low debt and shareholder distribution. . In addition, as rate hikes gain momentum in the U.S. and other economies around the world, we expect investors to pay a premium for names with low debt and sell those with high debt, creating an opportunity to get higher returns on TGA relative to peers. especially AMPY and BNEFF, which have great leverage.

Key risks

TGA is a good option for investors looking to get high returns on oil and gas exploration and production. The fact that it is a small cap means that it can move faster than its larger counterparts. It is also highly valued at 2.37x EV / EBITDA [TTM], which is less than 6.08x of EGY. The reason we are comparing it to EGY and not the rest is that EGY is the only similarly sized partner that is tracking according to TGA in terms of its debt profile, cash generation and profitability. AMPY is not profitable and BNEFF, although profitable, is heavily indebted.

Despite all its positives, however, investors should also be aware of the key risks of TGA. The first is the sustainability of dividend and stock repurchase plans. The company’s dividend, which it intends to pay semi-annually, is correlated with the cash flow from its operations in Egypt, according to the company’s press releases. In its presentation to investors in June 2022, the company notes that it has renewed its key projects in Egypt. However, there is a significant concentration risk with respect to TGA’s asset base. Relying heavily on a country can be disastrous in the event of economic, political, or military development.

The other risk is falling oil prices. While analysts see the current high prices hold for a while, oil prices will eventually fall. This is just the inherent nature of cyclical sectors. When this happens, small capitalizations, such as TGA, which have risen much faster than large ones, will also decline much faster. Therefore, investors who buy into TGA must take this volatility into account and manage their operations and risk accordingly.

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