Bellatrix Exploration Ltd (TSX:BXE) has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
Bellatrix Exploration Ltd., an oil and gas company, engages in the acquisition, exploration, development, and production of oil and natural gas reserves in the provinces of Alberta, British Columbia, and Saskatchewan in Canada. Started in 2000, it operates in Canada and is recently valued at CA$86.95M.
The first thing that struck me was the pessimistic outlook for BXE. A consensus of CA oil, gas and consumable fuels analysts covering the stock indicates that its revenue level is expected to decline by -0.086% by 2020. As BXE is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -CA$117.31M to -CA$31.17M.
BXE’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. Two major red flags for BXE are its high level of debt at 0.55x equity, and its low level of cash generated from its core operating activities, covering a mere 14.70% of debt. Although debt levels have been declining over time, and its interest income is able to cover interest payment, cash management is still not optimal and could still be improved. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of BXE’s financial health lowers my conviction around the sustainability of the business going forward. BXE has poor liquidity management. Firstly, its cash and other liquid assets are not sufficient to meet its upcoming liabilities within the year, let alone its longer term liabilities. Secondly, more than a fifth of its total assets are physical and illiquid, such as inventory. Keeping in mind the downside risk, if we think about the worst case scenario, such as a downturn or bankruptcy, a non-trivial portion of its assets will be hard to liquidate and redistribute back to investors.
The current share price for BXE is CA$1.54. With 56.46 million shares, that’s a CA$86.95M market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 0.1x vs. the industry average of 1.2x.
A good company is reflected in its financials, and for BXE, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.