Canadians: Avoid This 1 Energy Stock at All Costs!

Frontera Energy Corp. is not a stock for your TFSA or RRSP. Here is why you should avoid this stock.

| More on:

Frontera (TSX:FEC) is an oil and gas company engaged in the exploration, development, and production of crude oil and natural gas in South America. The company’s primary production is crude oil followed by natural gas. The largest markets it supplies is the United States and China.

Its share price is down 9.35% since the beginning of the year, and it has a current market capitalization of $1 billion.

An interpretation of the numbers

For the six months ended June 30, 2019, the company reported a poor balance sheet with $3.4 billion in negative retained earnings compared to $2.5 billion of assets. The company reported an increased total asset from $2.3 billion to $2.5 billion driven by an increase in intangible assets of $65 million, and an increase in deferred tax asset of $144 million. Its total liabilities are virtually unchanged with a reduction in accounts payable of $95 million, offset by increases in other liabilities.

Looking at the income statement, the company reported an increase in overall revenues from $689 million to $755 million, driven by an increase in sales of oil and gas for trading of $72 million. The company reported reduced operating expenses, which result in a pre-tax income of $152 million, up from a pre-tax net loss of $173 million the prior year. Overall, the company performed well this quarter with after-tax net income of $287 million, up from a net loss of $196 million in 2018.

Frontera continues to generate strong operating cash flows from $138 million in 2018 to $248 million in 2019. The company paid $31 million in dividends while decreasing capital-expenditure spending slightly from $126 million to $117 million.

But wait, there’s more

The company’s notes to its financials indicate a couple of important items.

Firstly, the company acquired control of CGX Energy by buying $19 million in shares to increase ownership from 48.2% to 67.8%. CGX is involved in the exploration and development of petroleum and natural gas in Guyana. This strengthens Frontera’s presence in another South American country given that it is primarily focused in Columbia and Peru. This acquisition is beneficial for investors, as the company received a net cash inflow of $4 million in addition to future revenues.

Secondly, the company derives the majority of its revenues from its Colombian operations. For the six months ended June 30, 2019, the company recognized $656,000 in net income from Peru compared to $15 million the prior year. Columbia has grown significantly with net income of $124 million compared to a net loss of $43 million in 2018. It’s Canada and Other division continues to lag behind with a $9 million net loss in 2019.

Thirdly, the company recognizes a $65 million increase in intangible assets from $0 the prior year. This is due to the termination of pipeline capacity rights held by Transporte Incorporado. The company paid $48.5 million to Transporte plus an additional $20.1 million to settle receivables. This transaction nullifies the need for Frontera to pay monthly premiums to Transporte amounting to $90 million over the life of the contract. Overall, the company benefitted from the deal.

Foolish takeaway

Investors looking to diversify their portfolios and purchase shares of an oil and gas company should not consider buying Frontera. Given its $3.4 billion negative retained earnings, it is very hard for investors to stomach the fact that the company has no real value. Fellow fool Matt Smith begs to differ.

If you are looking to add an energy stock to your portfolio, I would suggest looking here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chen Liu has no position in any of the stocks mentioned.

More on Energy Stocks

sources of renewable energy
Energy Stocks

Canadian Renewable Energy Stocks to Buy Now

Renewable companies in Canada are currently struggling through a challenging phase, but quite a few of them are still worth…

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy, Sell, or Hold for 2025?

CNQ stock is down in recent months. Is a rebound on the way next year?

Read more »

a person looks out a window into a cityscape
Energy Stocks

2 No-Brainer Energy Stocks to Buy With $500 Right Now

Two low-priced energy stocks can reward investors who have limited capital with far superior returns than expensive peers.

Read more »

canadian energy oil
Energy Stocks

Where Will Suncor Stock Be in 1 Year?

Suncor Energy Inc (TSX:SU) stock is doing well this year. Will it still be doing well next year?

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Best Stock to Buy Right Now: Cenovus vs Baytex?

It may not seem like a good time to buy most energy stocks, but there are always exceptions.

Read more »

A bull and bear face off.
Energy Stocks

Dividend Investors: Top Canadian Energy Stocks for November

These three dividend-payers are on a bullish uptrend.

Read more »

analyze data
Energy Stocks

Buy 8,850 Shares of This Top Dividend Stock for $2,000/Month in Passive Income

Let's do the math on what it would take to generate $2,000 a month in passive income from Enbridge (TSX:ENB)…

Read more »

oil and gas pipeline
Energy Stocks

Is TC Energy Stock a Good Buy?

TC Energy stock has a lot going for it, but there are also a few red flags to consider before…

Read more »