Pengrowth Energy: Getting Paid 6.60% To Wait For Lindbergh

| About: Pengrowth Energy (PGH)


Pengrowth Energy posts a solid quarter with production, FFO, and operating netbacks above guidance.

The crucial Lindbergh remains on-track for first steam in Q4 2014.

However, estimated costs for the project have increased 7%.

Pengrowth Energy (NYSE:PGH) has been one of my best performing stocks since I bought in late in 2012. With its 6.60% yield, 30% discount to NAV, and upcoming Lindbergh production growth, Pengrowth Energy continues to offer a compelling risk/return profile for both income and value investors.

Q1 2014 Overview

  • Production: 75,102 BOE/D

  • FFO: $140 million

  • FFO per share: $0.27

  • Oil and gas sales: $387 million

  • Oil and gas sales per BOE: $57.24

  • Operating expenses per BOE: $15.39

  • Operating netbacks per BOE: $29.71

Overall Pengrowth Energy posted a solid quarter. In nearly all aspects, the company exceeded its own guidance and analysts estimates.

While production did fall 3% to 75,102 BOE/D, FFO (a key metric of profitability) came in at $140 million, up 32% from $106 million last quarter. On a share basis, FFO came in at $0.27, up from $0.20 last quarter.

Pengrowth Energy' FFO was aided by a 24% increase in oil and gas sales to $57.24 per BOE, slightly offset by higher royalty and G&A expenses. As a result, operating netbacks improved 42% to $29.71 per BOE from $20.82.

Production Overview

As noted above, Pengrowth Energy's production fell 3% to 75,102 BOE/D from 77,371 BOE/D last quarter. However, a closer look is merited.

Below is a breakdown of the production by type:

  • Light Oil: 22,444 BBL/D (flat Q/Q)

  • Heavy Oil: 8,255 BBL/D (down 1% Q/Q)

  • NGLs: 10,751 BBL/D (up 2% Q/Q)

  • Natural Gas: 201,907 MCF/D (down 7% Q/Q)

As can be seen, Pengrowth Energy's production decline was focused on natural gas. This was widely expected as the company has been shifting capital towards light oil and Lindbergh. The other variations such as the uptick in NGLs and decrease in heavy oil were one-time items related to weather and improved ethane pricing.

Below is a breakdown of the realized sales prices:

  • Light Oil: $97.03 per BBL (up 17% Q/Q)

  • Heavy Oil: $77.12 per BBL (up 26% Q/Q)

  • NGLs: $59.12 per BBL (down 2% Q/Q)

  • Natural Gas: $6.35 per MCF (up 100% Q/Q)

As expected, realized prices for oil, both heavy and light, were up huge. This is almost entirely due to lower crude oil differentials and slightly higher prices.

The discount to WTI for light oil fell 44% to below $10 per BBL from nearly $16 per BBL last quarter. For heavy oil, the discount to WSC fell 25% to $25.47 per BBL from $33.68 per BBL last quarter.

For natural gas, Pengrowth Energy saw its prices double, thanks to much higher NYMEX prices and a much smaller spread to AECO. However, NGLs prices actually fell 2% due to a higher mix of lower priced ethane.

When taken altogether, Pengrowth Energy's average realized price per BOE was $63.00, up 30% from $47.92 per BOE last quarter. However, when factoring in hedging losses, the realized price drops to $57.24 per BOE, up 24% from $46.08 per BOE last quarter.

Lindbergh Update

Pengrowth Energy's Lindbergh project is well on its way to completion. Phase I is estimated to produce around 12,500 BBL/D of thermal crude, with a potential expansion to 50,000 BBL/D over the next five years. This production is critical to Pengrowth Energy's future as it will add a high netback, low decline production base to offset the current capital intensive legacy light oil assets.

The company has spent 75% of the capital needed for Phase I and expects first steam to commence sometime in Q4 2014 while the first oil is expected to be produced in Q1 2015.

However, costs for the project have increased to $630 million, up $40 million, or 7%, from the previous estimate of $590 million. Pengrowth Energy noted that around $20 million of the increase is due to higher costs related to a stronger dollar and weaker Loonie. The other $20 million are a mix of other expenses including project scope changes, fuel and weather costs, and pre-investment into Phase II.


Of note, it is quite striking to see just how much of an impact hedges had on Pengrowth Energy's results. If no hedges were in place the company could have easily added 5 or 6 cents to its FFO. Derivatives can cut both ways however as these same hedges gave the company's production a floor price during some of the bad times last year.

In my opinion, Pengrowth Energy's results should send the stock to above $7.00 per share. However, knowing how fickle the market can be, I would not be surprised if the stock has a muted reaction.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am long PGH. 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.