Pengrowth Energy (PGH) is an oil and natural gas producing company based out of Alberta, Canada with the majority of its projects located there. One such project is the Lindberg thermal project where the company is employing advanced technology to extract bitumen more efficiently. In addition to this project, Pengrowth is also planning to increase oil production from the Lochend Cardium project. With the favorable price environment for oil, Pengrowth is in a position to exploit this opportunity and increase its profitability.
Going for more bitumen, efficiently
Pengrowth has operations in the Cold Lake region of Alberta, known as the Lindberg thermal project. Pengrowth has a 100% stake in this project, which is designed to extract bitumen from the oil sands found in the Cold Lake area with the help of steam. Steam is used to extract bitumen from a depth of more than 200 feet, or ft, below the ground. The process employed by Pengrowth is known as Steam Assisted Gravity Drainage, or SAGD. In SAGD two horizontal wells are employed, out of which is used for the injection of high-pressured steam into the reservoir and the second is used to extract the bitumen from the reservoir. The high pressured steam is used to reduce the viscosity of bitumen in the reservoir, which then flows into the second well. The bitumen in the second well is then pumped out.
The SAGD technology applied by Pengrowth has a cumulative steam oil ratio, or CSOR, of around 2 since the starting of project in February last year up to the second quarter ending in June this year. Steam oil ratio, or SOR, is the amount of steam needed to produce a barrel of oil. The SOR is a metric used to measure the efficiency of the SAGD process of bitumen extraction; the lower the ratio the more efficient the process. The company also achieved an Instantaneous Steam Oil Ratio, or ISOR, of 1.8. ISOR measures the current efficiency of the SAGD process. The declining SOR indicates that the company is achieving efficiency in the extraction of bitumen.
With its SAGD systems in place, Pengrowth is also planning to increase production from the Lindberg project significantly. In the pilot phase of this project, Pengrowth achieved production of around 2000 barrels of bitumen per day from its two well pairs. Pengrowth plans to increase the production from its Lindberg project to around 12,500 barrels per day by 2015, which will mark the end of the pilot phase of the Lindberg project. The production and the SOR rates achieved by Pengrowth from its pilot project are shown in the chart below:
A major reason for more investments in advanced technology in the Lindberg project is the quality of bitumen reserves available in the Cold Lake area in Alberta, which could provide Pengrowth with long-term growth. Alberta's total oil reserves are around 170.2 billion barrels, out of which around 99% comes from the oil sands. Oil sands are a type of petroleum deposit from which bitumen is produced. The Cold Lake area constitutes around 10% of Alberta's total bitumen reserve, which could be around 16 billion barrels of oil. So, Pengrowth's Lindberg thermal project has access to a huge potential reserve. Coupled with the access to the reserve of bitumen, the company's advancement in technology to extract bitumen from these oil sands provides a solid base to its long-term growth plans.
A major player in the Canadian oil sands is Suncor (SU). The company has around 6.9 billion barrels of proved and probable reserves in the oil sands. The company has around seven projects under its belt, which are currently undergoing expansion or upgrades. The products derived from the oil sands operation is synthetic crude oil, diesel, and bitumen. The average production from the oil sands year-to-date, or YTD, is around 344,000 bpd. With its seven projects under development, the company will significantly boost production from the oil sands.
Another player in the Canadian oil sands is Husky Energy (OTCQB:HUSKF). The company invested in its "Sunrise Energy project" to increase its production from the Canadian oil sands. The Sunrise project is located in Fort McMurray in Alberta and has an estimated reserve of around 3.7 billion barrels of bitumen in the Athabasca oil sands. The production life of the project is estimated to be around 40 years. Husky is investing around $2.5 billion to develop the project with a production capacity of 60,000 bpd during the next year.
Sweet sweet oil
Pengrowth is also investing around $180 million in the Lochend Cardium project for development and increasing production of light oil. This project is located in the Greater Olds/ Garrington area in Alberta. Pengrowth has more than 70 undrilled locations within this project area. With around 12 wells in the region, Pengrowth realized a peak rate of 340 barrels of oil equivalent per day, or boepd. The company plans to drill around three more wells by the end of this year, taking the well count to around 15. The estimated ultimate recovery, or EUR, is estimated to be around 233 million barrels of oil equivalent, or mboe. The company realized a netback of around $70 per barrel on "Flat Edmonton Par" price of $90 per barrel. Netback is the gain or loss that occurs on selling per barrel of oil equivalent. With the improvement of the price environment of oil, we expect the company will generate better margins.
"Edmonton Par" is the benchmark price of light, sweet oil produced in Canada. The prices of the Edmonton par are based on the U.S. benchmark of West Texas Intermediate, or WTI. This means that in general if the WTI prices increase, then the Edmonton Par price will also increase. The chart below shows the forecasts of the WTI prices in the coming quarters and next year:
The graph shows that the price on WTI ranges between $90 per barrel and $100 per barrel. As shown, the price forecast of per barrel approaches near $100, which means that Pengrowth can realize a better price for light oil produced, resulting in a greater netback for the company. According to the company's estimate, the netback will range between $69 per barrel to around $77 per barrel. So the greater production of light oil coupled with an improving price environment will continue to increase Pengrowth's profitability.
On the growth path
Revenue in the second quarter ending in June 2013
Price-to-Sales Ratio, or P/S
From the above table, we calculate that the company earned per share revenue of around $0.684. On annualizing the quarterly revenue per share, we get a per share revenue of around $2.74. At the current stock price of around $6.45, we calculate the P/S ratio as 2.35. As can be seen from the table, the current P/S ratio is 2.43, which indicates that the stock is trading at an attractive rate. The Lindberg project for extracting bitumen will further enhance Pengrowth's revenue growth. Additionally, the improving price environment for oil will help the company to realize higher revenue. With strong revenue drivers and an attractive valuation, we are positive about Pengrowth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.