Editor’s Note: Ideas from HFI Research is a separate subscription from HFI Research. Cardinal Energy is not a holding in the HFI Portfolio, so this write-up is not included.
Cardinal Energy was first written up on August 7, 2023. Please see the public post here.
By: Jon Costello
Note: Dollar values are in Canadian dollars unless otherwise specified.
Cardinal Energy (CJ:CA) isn’t one of our pound-the-table energy stock longs over the next few years like Strathcona Resources (SCR:CA) and Veren (VRN). However, we believe it can serve a constructive role in a portfolio as an income-generating name with big upside potential over the next three to five years.
We’re No Longer Hesitant to Buy
We’re considering buying Cardinal shares for our HFIR Energy Income portfolio. Our main hurdle for making a commitment in the name has been the risk that sustained low oil prices could force a dividend cut. This risk has diminished over the past several weeks for several reasons.
The primary reason is the company's recent capital raise. On January 3, Cardinal announced the closing of a $60 million bought-deal financing. The deal included 50,000 senior subordinated unsecured debentures issued for $1,000, which pay interest of 7.75% annually. Each debenture has 65 common share purchase warrants that are exercisable at $7.00 for three years after the closing date. These shares dilute existing shareholders by 2%.
The capital infusion largely staves off risk to shareholders stemming from either a dividend cut or additional equity issuance.
Another reason Cardinal’s outlook has brightened relates to oil macro. The major oil market analyst organizations, like the IEA, forecast inventory builds beginning in the first quarter, but they are not materializing. Moreover, real-time market readings imply that builds aren’t going to happen, at least not in the first quarter. Oil well freeze-offs in the U.S. are slated to further reduce first-quarter global supply by 500,000 bbl/d, improving the supply/demand balance.
Stable oil prices above Cardinal’s cash flow breakeven slightly below US$70 per barrel WTI will reduce the risk of a dividend cut even further. We expect low inventory builds at best in the subsequent quarters of 2025 and draws in 2026, barring a global recession. If our view plays out, and if consensus begins to turn more bullish, Cardinal shares are likely to be bought and appreciate significantly by the end of 2025 from their current price of $6.60.