Pengrowth Energy Trust's (PGH) decision to cut its January distribution is tough on investors near term, but it was the right thing to do given the current economic climate, says Bank of Montreal analyst Gordon Tait.
Mr. Tait said in a note to clients:
We have been concerned about the sustainability of Pengrowth’s distribution level given the continued weakness in commodities. Therefore, the distribution cut is a step in the right direction. In light of the current credit and commodity price environment, we believe preserving a company’s balance sheet should be among the top operational and strategic priorities for management.
Pengrowth said Thursday after market close that it was reducing next month's distribution by 25% from C$0.22.5 per unit to C$0.17 per unit. Shares, which climbed 5% to C$9.75 on Friday, were down 5% to C$9.18 at 12:30 p.m. ET on Monday.
Mr. Tait reduced his cash distribution estimates to C$2.59 per unit from C$2.70 in 2008, and to C$2.04 from C$2.30 in 2009 and 2010. He also calculated the trust’s basic payout ratio to be 70% in 2008, 76% in 2009 and 2010. The analyst maintained his "market perform" rating and dropped his price target from C$14 to C$13.
In addition to lowering the distribution, Pengrowth also lowered its 2009 capital budget by 47% to C$215-million.
Mr. Tait noted that despite the significant reduction in the capital budget, Pengrowth's production is only expected to fall 6% next year.