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Summary

  • The company has shown solid growth in its funds flows (about 4%) indicating better operations.
  • The reserve replacement of 211% is hugely impressive and should help Pengrowth continue its growth.
  • Lindbergh Thermal Project is likely to result in considerable increase in the revenues as well as cash flows for the company.

Pengrowth Energy Corporation (NYSE:PGH) is a Canadian oil and gas development company operating in the resource rich areas of Alberta, British Colombia, Ontario and Nova Scotia. The company includes conventional non-thermal oil and gas operations along with latest and long lived thermal Lindbergh Terminal in East Central Alberta. Over the last few years, the company has made several changes in its structure, including changes in the management and focused on long-term high yielding projects by trimming non-core assets from its portfolio. The company also had a financially stable year complemented by substantial increase in its product throughput in the same period.

Asset Overview - Preliminary Steps towards Success

In order to analyze the assets of the company and what prospective values do they provide in the future, initially we have to identify its existing potential. From the financial and operational point of view, Pengrowth delivered a remarkable year with a total combined production of 84,527 BOE/d in the last year with revenues of CDN1.54 billion ($1.4 billion), showing an increase of around 3.8% compared to the last year. Moreover, the funds from operations (FFO) also increased by 4.1% to CDN0.561 billion ($0.51 billion) in the last year, which depicts considerable operational growth in the company.

The company was also able to successfully fund Phase I of its thermal Lindbergh Project from sale of assets in the last two years. The Lindbergh Thermal project holds a key growth opportunity for the company in the region, which I will discuss later in this article. Moreover, energy companies replace their depleting assets in order to achieve long-term growth and stability in the operations. Therefore, Pengrowth was able to replace 211% of its production with new Proved and Probable (2P) reserves while extending its reserve life to 17.4 years.

The core growth areas for the company include Non-thermal Oil and Gas projects, which include a large land base in Greater Olds and Thermal Lindbergh project. Analyzing the Non-thermal asset base of the company, this region holds great opportunities in the Cardium sands with 2P reserves of 84MMboe with total acreage of production of 21,398 BOE/d in the region.

The company is also planning to add twin gas pipelines in the Olds region. The project will double the southern portion of an existing pipeline currently delivering sour gas from the north to the Olds plant with an acreage of 6.4 kilometers. The company is currently in the process of getting necessary requirements in order to start construction this summer. The new pipeline will add increased natural gas supply to the Olds plant, and increase its total Non-thermal throughput in the coming quarters. For the Thermal production, currently, the company is focusing on its Lindbergh Thermal project that will be expected to deliver operational yields by the start of 2015.

Lindbergh Thermal Project

The new management at Pengrowth has planned to reduce its debt by selling non-core assets worth $1 billion, and the focus has been turned to the development of its Lindbergh Steam Assisted Gravity Drainage project. Pengrowth started the project in 2012 with strong pilot tests outcomes, which demonstrated competitive steam/oil ratios and well productivity, and is expected to commence operations in 2015. According to the pilot test results of the Lindbergh wells, the total cumulative production has now exceeded 1.1 million barrels. The company has spent around 65% of the allocated capital expenditures till date and expects about 12,500 BBls/D of high margin thermal oil production for Pengrowth. This will increase the Funds from Operations per share by at least 30% after its commencement in the coming year. Also, the bitumen quality of the Lindbergh wells is of higher quality, which provides an advantage to the company in terms of reserves quality, resulting in increased cash flows.

Drifter Projects is supervising the commercial phase of the Lindbergh project construction and will likely manage to finish construction in the limits of the budget while some other oil companies have faced the issue of having to spend more than the budget. Analyzing the potential profitability of the Phase I, the company has submitted application for the approval of Lindbergh Project Phase II, which is expected to be completed in 2017.

Conclusion

Pengrowth is making solid moves to enhance its future funds flows and free cash flows. The Lindbergh project will help the company enhance its revenues as well as cash flows. Along with the growth opportunity, the stock also offers a juicy yield of about 7%, with annual dividend close to $0.44 per share. We believe Pengrowth will be a solid long-term pick for both income as well as growth investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.