Kiwetinohk – unusual name but promising

[Petroleum economist]

Kiwetinohk means “north” or “northward” in Cree, the most widely spoken Indigenous language in Canada.

Introduction
Kiwetinohk was formed in Feb 2018 and is a small Canadian oil and gas company with operations in the Duvernay and Montney basin in Alberta. Market value is US $ 479 M. Shares have been listed at the TSX since early 2022. Beside oil and gas developments, Kiwetinohk is planning the development of gas fired and solar power generation. ARC resources is the majority shareowner of Kiwetinohk with 63.1% of the shares.

Summary
Reserves are ample and are expected to increase. Production is growing at a high rate. The FCF is negative, but despite this the balance sheet is sound. The profitability is good and the PE is low. Shareholder returns can start late 2025 and can reach thereafter very attractive levels. Power development is ambitious and currently is slow. Kiwetinohk ranks a high 11th out of 82 companies
The share price increased in 2024 between Jan and late-December with 38.2%.

Reserves
• Proven reserves have risen sharply, from 3.5 M BoE (2020) to 123.2 M BoE (2023).
• 90% of the reserves increases come from acquisitions.
• Most of the reserves additions came in Feb 2022 through a C $335 M acquisition from Distinction with Duvernay and Montney basis assets in the Simonette area in northwest Alberta.
• 2023 proven reserves (123.2 M BoE) are equivalent to a good 11.9 years of 2024 production (industry average 9.5-10.0 years).
• Reserves Replacement Ratio (RRR) between 2021 to 2023 was a low 0.66 (industry average 1.02).
• The 2021-2023 RRR was low due to the de-booking of all the conventional gas and light/medium oil reserves (21 M BoE) in 2021.
• The 2023 RRR was a good 1.77 (industry average 0.95).
• Kiwetinohk has ample undrilled/un-booked acreage and potential drilling locations. It is expected that reserves will continue to grow.
• The reserves and RRR allow a substantial growth of production until 2026.

Production
• Kiwetinohk production has been growing fast in the last few years. Production went up 224% from 7.0 K BoE/d (2021) to 22.6 K BoE/d (2023).
• Growth continued in 2024, albeit at a slower pace. The 2024 production outlook of 26.0-27.5 K BoE/d is 20.5% above 2023. For Q4 I except a production of 29.0 K BoE/d.
• The 2025 outlook for production is 31-34 K BoE/d, 20% above 2024. Focus is on the development of the Simonette Duvernay.
• Kiwetinohk targets a production of 40 K BoE/d in 2026 for which pipeline capacity and infrastructure is in place.
• Fluids are 34% oil/condensate (mostly the latter), 14% NGL and 51% gas.
• Oil and gas plans beyond 2026 are unknown.

Power generation
• The 10-year strategy is to build power generation projects that capture renewable energy (solar) and to build an array of natural gas-fired power generation projects.
• The gas fired power stations will include CCS supporting these projects.
• So far, no power projects have materialized.
• The power division took a hit with a C$ 29.2 impairment in Q3 2024 on power projects due to changing government regulations/uncertainties.
• Capex for power is currently limited to C$ 4-8 M/year.

Balance sheet
• The balance sheet is in good shape.
• The equity ratio (=equity/balance sheet total) in Q3 2024 (63.2%) was below late 2023 (65.4%) due negative cash flow in 2024. The equity ratio is at a good level.
• Q3 net debt (C$ 219M) was well above late 2023 (C$ 194 M), again due the negative cash flow.
• Debt/EBITDA ratio is 2024 will be a 0.87 and as such is no area of concern. Capex is controlled such that the long-term debt/EBITDA ratio stays around 1.0.
• 2025 will be the first year with a positive cash flow.
• The balance sheet allows moderate shareholder returns to start in H2 2025.

Profitability
• Kiwetinohk is a very profitable company.
• Q3 eps (ignoring non-cash hedging losses and impairments) was C$ 0.25, below C$ 0.60 in Q1 and C$ 0.55 in Q2.
• The drop in eps was mostly due to lower oil prices. Unit operating/transportation costs, etc. are pretty constant.
• For 2024 with WTI=$ 70/bbl I expect an eps of C$ 1.79.
• The eps can grow in 2025 to C$ 3.08 and in 2026-2028 to C$4.35-4.40.
• Royalties are low at 6-8%, typical for a company which has not yet earned back it investments. Royalties over time can go up.
• Unit costs (inclusive depreciation, interest and overheads) are a medium $ 23.92/BoE.

Shareholder returns
• Due to negative FCF, Kiwetinohk has not returned funds to shareholders.
• H1 2025 will see the first positive FCF.
• First shareholder returns therefore can start in H2 2025. The form of the returns (dividends and/or share buybacks) is uncertain.
• Returns can increase in 2026 to 14%.

Conclusions
Reserves are ample and are expected to increase. Production is growing at a high rate. The FCF is negative, but despite this the balance sheet is sound. The profitability is good and the PE is low. Shareholder returns can start late 2025 and can reach thereafter very attractive levels. Power development is ambitious and currently is slow.

I am adding Kiwetinohk in 2025 to my ranking system. It comes in at a high 11th out of 82 companies.