Enterra Energy Trust: Crippling Debt Makes Speedy Recovery Unlikely -- Barron's

Includes: ENT, JDO, JMG-OLD
by: SA Eli Hoffmann

Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

Enterra's Woes Mount by Vito J. Racanelli

Highlighted companies: Enterra Energy Trust (NASDAQ:ENT), JED Oil Inc. (JDO), JMG Exploration (JMG-OLD)
Summary: Enterra Energy Trust (ENT) shares trade at $8.80, down from $24 last October. A number of reasons: (1) A 'sympathy move' following the meltdown in JED Oil Inc. (JDO) after it announced wells on its most important property weren't producing nearly as much as expected, and suspended production. (2) The collapse of natural gas prices, $5/million BTU down from $15 last winter, caused it to lower monthly dividends to $0.12/unit from $0.18; dividends, which are exempt from corporate taxation, are one of energy trusts' main selling points. (3) Low prices also forced it to terminate otherwise profitable revenue-sharing deals with drillers JED and JMG Exploration (JMG-OLD). (4) Of its $300M in debt, $200M is at Libor+4.5%, and matured on Sept. 20, meaning the rate escalates +1% for each of the next three months it goes unpaid; analysts are pessimistic they can refinance this debt without significant dilution. Marathon Resource Investments is short ENT, while Glickenhaus & Co. is adamant they're not selling, and calls it a "screaming buy" if it can solve the debt problem and gas prices rise. Barron's: "Those are big ifs. A reasonable scenario would be for Enterra to refinance via $150 million in new debt and $150 million in equity. At the current price of 8.80, that could mean as much as a 40% increase in shares outstanding. This would painfully dilute current unit holders, and would make another dividend cut likely."
Quick comment: Finding the Best Dividend Paying Equities: The Case of Enterra Energy Trust • Background: Enterra Energy Lowers Target Payout Ratio Range; Slashes Monthly Distribution To US$0.12/unit