In 2012, Parallel Energy Trust (OTC:PEYTF) hit investors with one big headache after another. A host of challenges faced during the year took a heavy toll on the share price which plunged from a yearly high of almost $9 to less than $4. Now that the long anticipated dividend cut is in, where does Parallel go from here? Let's take a look at the numbers.
Between its operational challenges and the collapse of liquids pricing in its area of operations, the company ended up cutting its distribution by 38% to $0.05 per share from $0.08.
Parallel Energy announced a 2013 budget of $14.5 million for 2013 with production forecasted to average between 7,200 and 7,400 boe/day for the year. Let's go with the lower end of the range as a conservative estimate and based on past performance (production hiccups):
- Average annual production of 7,200 boe/d
- Annual production mix to average 25% condensate, 36% NGLs and 39% natural gas
- Forecasted cash flow of $49 million based on
- US$90.00 per bbl WTI, US$4.00 NYMEX natural gas price and an average NGL price of 45% of WTI
According to the company, this level of distribution provides for a basic payout ratio of approximately 65% and an all-in payout ratio of approximately 95% at the low end of the Trust's production guidance for 2013, utilizing current forward strip prices.
I think the price of natural gas is a little bit optimistic, I would go with $3.50 NYMEX for 2013 which bumps the basic payout ratio to 68%. However, the all in payout ratio of 95% is no longer on the menu as you can see.
Close, but no cigar!
The guidance provided by the company is a projection into 2013 just like this balance sheet you see in the screenshot above. Results will be a function of actual realized commodity prices assuming no operational hiccups. This means that the numbers above provide a pretty good snapshot on how the company financially looks like in 2013.
Parallel Energy mentioned its intention to pay down debt by $10 million in 2013 "from excess cash flow over capital expenditures and distributions and through selective use of the Trust's DRIP programs." But from the looks of it, it won't happen. At least not at this level of DRIP going forward (since Premium DRIP has been cancelled, the company expects 10-12% rate of participation.)
The flaw in the company's model lies in the price of natural gas, $4/mcf NYMEX might not materialize in 2013. Remember, when it comes to natural gas, the weather will have the last word and so far winter in the north-east has been mild.
Last time I discussed PLT, my estimate was for a deeper cut down to $0.48 rather than $0.60. At that level, Parallel Energy would have been able to earmark more than $8 million to paying down debt at $3.50/mcf NYMEX. The fact that the stock price is trading below $4 after the dividend cut should not be surprising.
I believe there are a few reasons the stock is yielding 15%. The yield is reflecting the following risks/variables:
- Management needs to win back investor confidence
- Management needs to deliver on execution
- Downside risk in the price of WTI oil
- Natural Gas prices might not reach $4.00/mcf in 2013
- Debt to Cash flow above 4.4x
Going forward the company needs to focus on delivering what it promised with no operational hiccups. Parallel needs to improve its image as much as its balance sheet - they're both of equal importance.
An improvement in realized commodity pricing or better well productivity would certainly help. NGLs are budgeted at 45% of WTI whereby they sold at 55% a year ago. However, forecasts call for a recovery in 2014 rather than in 2013. As for well productivity, the company is currently budgeting IP30 rates of 30 boe/d per well. If they report better IP30 rates, that would certainly help the bottom line as well.
The company enters 2013 with 3 positive points:
- 60% of estimated net revenue for 2013 is hedged
- Very low decline rate in production: ~8%
- The CEO is out of the picture
The dividend cut is a step in the right direction, but it's only the beginning of what is most likely a very long road to recovery. In this risk off environment, the dividend might not be in danger this year but capital gains potential is in my opinion extremely limited. Obviously, investors need to keep a close eye on realized commodity pricing during 2013 as our scenario is only a snapshot of the future.
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