Seeking Alpha
Long only, value, special situations, long-term horizon
Profile| Send Message|
( followers)  

Last week, Pengrowth Energy Corporation (NYSE:PGH) reported its results for the fourth quarter and its year-end reserve rates. Shares of Pengrowth have been in a state of continued decline for several months, but spiked up after reporting a strong increase in reserves and a continued commitment to maintain its dividend. Recent declines may have marked a bottom for the company and a strong long-term buying opportunity. See a recent performance chart for PGH: (click to enlarge)

During 2012, Pengrowth increased its proved and probable reserves by approximately 55 percent or 213 million barrels of oil equivalent. Pengrowth also added that this growth in reserves was equal to 672 percent of its 2012 production. Fourth quarter 2012 production averaged 94,039 barrels of oil equivalent per day, which is a 23 percent increase from the average production during the fourth quarter of 2011 (76,691 boe/d). Full-year average production volumes were 85,748 boe/d, which is a 16 percent increase from the average production in 2011 (73,973 boe/d).

A large part of the increase in production is based upon Pengrowth's acquisition and integration of NAL Energy acquisition, which added 27,000 boe/d of production and significant reserves. Moreover, the NAL acquisition increased the company's crude oil and natural gas liquids reserves and its liquids production ratio. Including the NAL assets, Pengrowth reported that its pre-tax net asset value was $8.61 per share at the end of 2012, based upon the reserves being discounted at 10 percent, also known as PV10. Additionally, PGH's proved and provable reserve life index increased to 14.7 years at year-end 2012, a 23 percent increase from 12 years at the end of 2011.

In late 2012, Pengrowth suspended its Premium Dividend program and noted that it did so based upon "the current low share price environment." The now defunct program provided eligible Canadian shareholders with an incentive for reinvesting their dividends in new shares. Other reinvesting incentives continue to exist under its DRiP program. Investors should consider the move a sensible one, as it should save the company money that was essentially being lost by giving shareholders who reinvested dividends a discount to the already arguably low market price.

Pengrowth's assets are located in Canada, across Alberta, British Columbia and Saskatchewan. Pengrowth shares declined considerably over the last year, largely due to declining natural gas prices and the negative effect they have had upon PGH's cash flow and assets. Pengrowth pursued the NAL acquisition to both increase its production and reserves, as well as to decrease its sensitivity to natural gas. The acquisition added more than 35 percent to PGH's production, and increased the company's inventory of oil and liquids-rich drilling locations to over 700.

On July 6, Pengrowth reduced its monthly dividend by about 42.8 percent, from $0.07 to $0.04. Pengrowth's cut had followed Enerplus Corporation (NYSE:ERF), another Canadian oil and gas company, which halved its monthly dividend, from $0.18 to $0.09. Both companies slashed their sizable payouts in reaction to the substantial decline in natural gas prices and weakening oil prices during the first half of 2012. Since then, natural gas stabilized and then increased by about 75 percent from 2012 lows. See a chart of natural gas prices over the last year: (click to enlarge)

Some might argue that the company would be better off if it reduced or even wholly suspended its dividend, and instead utilized that cash to repurchase shares and/or fund its necessary capital expenditures with the money being paid out to shareholders. During last week's conference call, Derek W. Evans, Pengrowth's President and Chief Executive Officer, commented that the company was "committed to maintaining its dividend at the current levels of $0.04 per share per month."

Moreover, Evans indicated that Pengrowth's 2013 capital program is fully funded and will not result in incremental debt in 2013, or the issuance of equity. Instead, the company intends to divest of up to $700 million of its assets in 2013, and to use the proceeds to fund capital commitments in 2014 and beyond. Evans also noted that its non-operated Saskatchewan should be up for sale by the end of March.

While there will likely be interest in the energy assets Pengrowth puts up for sale, some recent Canadian energy acquisition activity and related regulatory changes may have reduced the list of potential buyers. Last year Canada initially denied a bid by Petronas for Progress Energy Resources, stating the deal did not provide a net benefit to Canada. Then late last year, Canada approved a higher offer of about $5.2 billion that it deemed provided a net benefit. Canada also simultaneously approved a larger deal by CNOOC (NYSE:CEO), China's state-owned oil company, for Nexen Energy.

When Canada approved those deals, it also indicated a more stringent future policy framework for the review of state-owned investments in Canada. The policy change is an indication of the increased importance Canada is placing on retaining rights to its own resources, and also a message that there is going to be a premium placed on the price that the Canadian government will require of interested state-owned buyers in order to deem any future bid for energy assets to be a net benefit to Canada. Nonetheless, Canadian energy assets are still globally desirable, and it should be expected that Pengrowth should be able to sell its Saskatchewan assets within 2013.

It would appear that the company's probable 2013 production rates should help it maintain its present dividend payout, provided energy prices remain stable. Production may decline this year due to potential asset sales, but new projects should eventually help replace the loss and even eventually surpass present production rates. Moreover, the recent elimination of the Premium Dividend program should make it easier for PGH to continue paying out its sizable dividend going forward.

Source: Pengrowth Appears Poised To Rebound In 2013