Gas processing constraints, wildfire shut ins, and road closings combine to lower production

Curtailments hurt production, but drilling successes should offset lost sales

Results meet expectations, new drilling may be accelerating growth

Production slows, expenditures rise, and gas prices drop

Michael Heim

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Energy

Oil & Gas

InPlay Oil

Second quarter results 
 
InPlay Oil reported a loss of $0.09 per share versus an (adjusted) loss of $0.07 per share in the previous quarter but above our expectations for a loss of $0.12 per share.&nbsp; The EBITDA loss was $1.3 million versus a positive $4.1 million but better than our expectations for a loss of $2.6 million.&nbsp; Lower results reflect a sharp drop in oil prices and management&#8217;s decision to curtail production.&nbsp; This had largely been anticipated although we overestimated the drop in oil production and underestimated the drop in natural gas and NGL production.&nbsp; Oil prices declined more than expected although gas prices were firmer than last year when Canadian gas prices suffered from an oversupply of gas in storage.

 
<table border="1" style="border-collapse: collapse;width: 100%;height: 179px">
<tbody>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">
 </td>
<td style="width: 20%;height: 18px">2020-2Q</td>
<td style="width: 20%;height: 18px">2019-2Q</td>
<td style="width: 20%;height: 18px">2020-1Q</td>
<td style="width: 20%;height: 18px">Noble Est</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">Oil Production (boe/d)</td>
<td style="width: 20%;height: 18px">1,523</td>
<td style="width: 20%;height: 18px">2,739</td>
<td style="width: 20%;height: 18px">2,432</td>
<td style="width: 20%;height: 18px">500</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">Gas Production (mcf/d)</td>
<td style="width: 20%;height: 18px">6,424</td>
<td style="width: 20%;height: 18px">10,647</td>
<td style="width: 20%;height: 18px">9,271</td>
<td style="width: 20%;height: 18px">9,271</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">NGL Production (boe/d)</td>
<td style="width: 20%;height: 18px">561</td>
<td style="width: 20%;height: 18px">665</td>
<td style="width: 20%;height: 18px">807</td>
<td style="width: 20%;height: 18px">800</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">Total Production (boe/d)</td>
<td style="width: 20%;height: 18px">3,154</td>
<td style="width: 20%;height: 18px">5,179</td>
<td style="width: 20%;height: 18px">4,784</td>
<td style="width: 20%;height: 18px">2,823</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">
 </td>
<td style="width: 20%;height: 18px">
 </td>
<td style="width: 20%;height: 18px">
 </td>
<td style="width: 20%;height: 18px">
 </td>
<td style="width: 20%;height: 18px">
 </td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">Realize Oil Prices ($Can)</td>
<td style="width: 20%;height: 18px">20.99</td>
<td style="width: 20%;height: 18px">61.41</td>
<td style="width: 20%;height: 18px">71.55</td>
<td style="width: 20%;height: 18px">36.175</td>
</tr>
<tr style="height: 16px">
<td style="width: 20%;height: 16px">Realized Gas Prices ($Can)</td>
<td style="width: 20%;height: 16px">2.03</td>
<td style="width: 20%;height: 16px">1.92</td>
<td style="width: 20%;height: 16px">1.00</td>
<td style="width: 20%;height: 16px">1.39</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">Realized NGL Price ($Can)</td>
<td style="width: 20%;height: 18px">20.99</td>
<td style="width: 20%;height: 18px">24.00</td>
<td style="width: 20%;height: 18px">19.66</td>
<td style="width: 20%;height: 18px">24.00</td>
</tr>
<tr style="height: 19px">
<td style="width: 20%;height: 19px">
 </td>
<td style="width: 20%;height: 19px">
 </td>
<td style="width: 20%;height: 19px">
 </td>
<td style="width: 20%;height: 19px">
 </td>
<td style="width: 20%;height: 19px">
 </td>
</tr>
</tbody>
</table>

 

 
Revenue came in largely as expected.&nbsp; Operating costs per barrel declined despite lower production, a testament to management&#8217;s efforts to eliminate waste.&nbsp; Perhaps the most surprising line item was the company&#8217;s SG&amp;A line.&nbsp; As management cut back production, it also cut back discretionary spending.&nbsp; The end result was a lower operating loss than expected and ultimately lower cash flow and earnings losses.

 
<table border="1" style="border-collapse: collapse;width: 100%;height: 91px">
<tbody>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">
 </td>
<td style="width: 20%;height: 18px">2020-2Q</td>
<td style="width: 20%;height: 18px">2019-2Q</td>
<td style="width: 20%;height: 18px">2020-1Q</td>
<td style="width: 20%;height: 18px">Noble Est</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">Revenues</td>
<td style="width: 20%;height: 18px">3,853</td>
<td style="width: 20%;height: 18px">18,386</td>
<td style="width: 20%;height: 18px">12,183</td>
<td style="width: 20%;height: 18px">3,677</td>
</tr>
<tr style="height: 19px">
<td style="width: 20%;height: 19px">Production Costs</td>
<td style="width: 20%;height: 19px">4,070</td>
<td style="width: 20%;height: 19px">6,744</td>
<td style="width: 20%;height: 19px">6,386</td>
<td style="width: 20%;height: 19px">3,810</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">&nbsp; Prod Cost per BOE</td>
<td style="width: 20%;height: 18px">14.18</td>
<td style="width: 20%;height: 18px">14.31</td>
<td style="width: 20%;height: 18px">14.67</td>
<td style="width: 20%;height: 18px">14.37</td>
</tr>
<tr>
<td style="width: 20%">Transportation Expense</td>
<td style="width: 20%">288</td>
<td style="width: 20%">420</td>
<td style="width: 20%">345</td>
<td style="width: 20%">210</td>
</tr>
<tr style="height: 18px">
<td style="width: 20%;height: 18px">SG&amp;A</td>
<td style="width: 20%;height: 18px">784</td>
<td style="width: 20%;height: 18px">1,795</td>
<td style="width: 20%;height: 18px">1,385</td>
<td style="width: 20%;height: 18px">2,244</td>
</tr>
<tr>
<td style="width: 20%">Share Based Compensation</td>
<td style="width: 20%">135</td>
<td style="width: 20%">162</td>
<td style="width: 20%">166</td>
<td style="width: 20%">250</td>
</tr>
<tr>
<td style="width: 20%">DDA</td>
<td style="width: 20%">3,979</td>
<td style="width: 20%">7,548</td>
<td style="width: 20%">7,433</td>
<td style="width: 20%">4,155</td>
</tr>
<tr>
<td style="width: 20%">Operating Income</td>
<td style="width: 20%">(5,403)</td>
<td style="width: 20%">1,717</td>
<td style="width: 20%">(3,533)</td>
<td style="width: 20%">(6,992)</td>
</tr>
</tbody>
</table>

 
 Oil prices have rebounded quicker than expected,&nbsp;and the company is responding
The dire warnings of the spring have faded away with West Texas Intermediate (WTI) oil prices climbing back above $40/bbl from second quarter prices near $20/bbl.&nbsp; We had projected prices to rise $5 each quarter until stabilizing around $50/bbl sometime in 2022.&nbsp; &nbsp;The rise in prices this summer puts us back on track to reach $50/bbl next year.&nbsp;Second quarter results included a modest loss associated with oil and gas hedge positions, some of which have already rolled off.&nbsp; Management indicated that it faces pressure to add new positions and will consider adding short-term swaps and collars if oil prices remain in the $42-$43 level.&nbsp;&nbsp; 
The company has responded by declaring its intent to resume drilling in the third quarter and bringing back curtailed and shut-in production..&nbsp; Management indicated it expects to reach pre-COVID production levels in late August.&nbsp; Management described that level as 4,300 bbls/day, down from peak production of 5,000 bbls/day in the summer of 2019 due to decreased drilling over the last twelve months. The company expects to spend $0.6 million in the third quarter and $4.2 million in the fourth quarter.
With energy prices having risen and production returning, we now believe the company will be EBITDA positive for the rest of the year.&nbsp; We expect free cash flow to be close to breakeven in the third quarter and to add to the company&#8217;s cash position in the fourth quarter.

 
New credit facility improves liquidity to bridge the gap until production returns to normal.&nbsp;&nbsp;
The company announced that it has signed an agreement with lenders for a 4-year, $25 million non-revolving term facility. The loan is part of Canadian Government&#8217;s stimulus program and comes at a low interest rate.&nbsp; The loan would cost 5% in the first year and 6% in the second year.&nbsp; The company had drawn down $59 million of its existing $65 million credit facility so the new loan was much needed.&nbsp; Management believes it will tap into the new facility when it begins drilling.&nbsp; Its intent is to hold debt to a level not much above $65 million.&nbsp; As indicated above, we expect the company to be free cash flow neutral and perhaps even positive in upcoming quarters so we believe it should be able to achieve its goal.&nbsp;&nbsp;
 The new credit facility should ease the mind of investors who were concerned about InPlay&#8217;s debt level.&nbsp; The improved liquidity position should provide a safety net until new drilling investments turn to cash flow.&nbsp;&nbsp;

 
We are reiterating our outperform rating and $0.60 per share price target.
With oil prices having returned to profitable levels and liquidity less of a concern, we belief the shares of InPlay offer an attractive return for energy investors.&nbsp; We are raising our 2020 revenue estimate to CAN$43 million from $31 million, our EBITDA estimate to $14.4 million from $1.3 million, and our earnings per share estimate to $(0.21) from $(0.41) to reflect higher pricing and increased production.&nbsp; While its record of continual production growth will be disrupted in 2020, we believe growth will resume beginning in 2021.&nbsp; We believe the company has attractive assets with a low cost structure and a management team that has the ability get the most out of those assets.

InPlay Oil (IPOOF)

Better-than-expected results and new credit facility may mean stock has bottomed out

Fundamental Analysis:

Rating: Log in to view

Gas processing constraints, wildfire shut ins, and road closings combine to lower production (IPOOF)

Curtailments hurt production, but drilling successes should offset lost sales (IPOOF)

Results meet expectations, new drilling may be accelerating growth (IPOOF)

Production slows, expenditures rise, and gas prices drop (IPOOF)

Inbox Intel from Channelchek.