Where Eagles Dare?

May.13.14 | About: Eagle Energy (EGRGF)

Summary

Review of their latest quarterly results.

A look at US Crude Oil Inventory levels.

A look at their trading patterns.

After I wrote my most recent piece on Eagle Energy Trust (ENYTF) I finally freed up some time to review Eagles latest quarterly.

These are some of the highlights:

After seeing most of Eastern North America get to experience the Polar Vortex, it's no surprise to see both Revenue per BOE up $98.02 (Q1) compared to $88.92 (Q4) and Field Netback up $54.29 compared to $47.58 (Q4). However, with US crude oil inventory levels above the five year average one wonders whether this increased pricing for oil will hold?

U.S Crude Oil Stocks

Source - EIA - This Week in Petroleum

On the Expense side - on a quarter over quarter per BOE basis, Operating costs went from $16.79 (Q4) to $17.54 (Q1), Finance costs went from $3.13 (Q4) to $3.24 (Q1) and Administrative expenses went from $12.80 (Q4) to $9.43 (Q1). On the outset it doesn't look to bad with the rise in Operating costs and Finance costs being more than offset by the decline in Administrative costs.

But does it?

On a year over year per BOE basis Operating costs are up 57%, Finance costs are up 66% and Administrative expenses are up 75% - not exactly an encouraging trend.

Moving on to the Balance Sheet - if I take Current Assets less Current Liabilities, Long term debt and Risk Management Liability I get Net Obligations of $100,254,000. When I look at their quarterly cash flow I get $10,341,000. So in theory D/CF annualized is 2.4x which in my opinion is a little bit high for a normal O&G company but certainly not the worst I have seen either.

However, when you consider that the distribution they are the hook for each quarter it becomes a little bit more disconcerting. They paid out $8,495,000 for the quarter in Cash distributions. That in theory leaves $1,846,000 for either capital expenditures or to pay down the debt. Annualizing that cash flow you now get D/CF of approximately 13.6x. Which is pretty extreme in my opinion.

What has saved them in the past is that they pay a good chunk of the dividend distribution in shares (their DRIP program) - so they are constantly financing and diluting the company.

Now, in their latest financial they indicate their model works if they can stay above 65% for the DRIP program.

This assumption is what I have been questioning. And here is why - they have had huge volumes of trades lately.

Eagle Energy Trust ChartClick to enlarge

Source Stockwatch

With the recent volumes of new buyers, and the high yield they are currently giving (17%), it's likely people chasing yield. And the question at hand is will they want cash payment or will they be happy receiving paper?

If they continue to collect paper, then there isn't really an issue with the company other than some of the trends I reported in the first part of the article.

If on the other hand they want the cash then the downward spiral begins. Less cash to grow an asset that depletes.

What I couldn't find in the Q1 report is what that cash payout ratio currently is. So I think (and subject to all the IFRS vagaries) I've calculated what that ratio is.

On the Condensed Consolidated Statements of Changes in Unitholders' Equity they indicate that they issued $5,241,000 worth of new trust units. So by taking $8,495,000 and dividing it by $5,241,000 we should get what percent are taking shares instead of cash. This amount comes out to 61.7% which is below their model. So that is what it was at the end of March. We are almost mid-May and who knows how many more have opted for cash?

One final point. I had an email from a friend who attended their presentation today. She pointed out that they have indicated they are looking at potentially selling their Permian Assets. In my opinion, if they do, the debt issue goes away, and it likely leaves a fair chunk to even do a bit of share buyback. More importantly, it has the potential to eliminate reliance on the DRIP program for financing.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.