(Idea) Cardinal Energy - Bargain Bin
Editor’s Note: Cardinal Energy is not a holding in the HFI Portfolio. Ideas from HFI Research is a separate paid subscription service from HFI Research.
Jan 26, 2025 Cardinal Write-up
By: Jon Costello
Note: Dollar values are in Canadian dollars unless otherwise specified.
The recent selloff amid global E&P stocks has sent Cardinal Energy (CJ:CA) shares deep into bargain territory. We fully expect the company to survive this downturn in fine shape. Investors in its shares will benefit from significant growth in production, cash flow, and dividends over the next two years and beyond.
Cardinal ensured its growth prospects by raining debt twice in 2025. The closed two term-loan unsecured debenture financings together totaled $105 million and featured a weighted average interest rate of 7.96%.
Combined with the company’s $190 million available on its borrowing base facility, the $105 million debt issuance ensured that Cardinal will have the resources necessary to fully develop its Reford project.
The downside of the debt issuance was that it increased the company’s cash interest expense and net debt-to-cash flow while marginally reducing its free cash flow breakeven.
Production Growth Set to Increase Shareholder Value
The financings will allow Cardinal to complete its growth projects. The company is working on a small oil sands steam-assisted gravity drainage (SAGD) project called Reford. The project’s completion timeframe has remained unchanged, with the pre-production warm-up phase scheduled to begin by the end of the year. Reford is expected to begin its production ramp in early 2026. It will transition to commercial production shortly thereafter.
When operating at capacity, Reford will add 6,000 bbl/d of heavy oil production to Cardinal’s existing production base of approximately 21,500 boe/d of mostly conventional light oil.
Once Reford has been placed into service, the company plans to begin its second SAGD project, called Kelfield. The project is also expected to add 6,000 bbl/d of heavy oil production and will increase Cardinal’s total production to 33,500 boe/d. Kelfield’s timing is currently expected to be one year after Reford.
The development timeline of these two projects is shown below.
Source: Cardinal Energy March 2025 Investor Presentation.
Cardinal currently expects to fund Kelfield using cash flow from operations, which will benefit from Reford’s production. Of course, if oil prices remain low, Cardinal will have the option of postponing its Kelfield project. We would only expect the company to proceed with the project if WTI is trading at the high-$60s per barrel or above. Anything below that level could risk the deterioration of the company’s financial position.
If both Reford and Kelfield are completed on time, we estimate that Cardinal will generate approximately $500 million in annual adjusted funds flow by the end of 202 at US$80 per barrel WTI. Its production would have increased from the current rate of 21,500 boe/d to 33,500 boe/d.
If Cardinal’s shares traded at four times cash flow, they would trade at approximately $12.00 per share by then. However, the shares may garner a premium relative to their historical trading multiple. We wouldn’t be surprised to see Cardinal shares trade to $13.50, and perhaps higher, depending on the prospects for additional oil sands projects planned at the time.