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Summary

  • Pengrowth Energy is a Canadian oil and gas company with an approximately 7% annual dividend yield.
  • Pengrowth Energy's business value and distribution projects are largely driven by its Lindbergh thermal development project.
  • Pengrowth Energy is an interesting alternative for investors who would gravitate towards traditional U.S. income vehicles.

Pengrowth Energy Corporation (NYSE:PGH) is a hidden dividend champion with a relatively low public profile, which I think is quite undeserved. Most energy companies in the United States yield somewhere between 2%-6% with some exceptions to the upside such as Linn Energy (NASDAQ:LINE) with a distribution yield of 10% or Kinder Morgan Energy Partners (NYSE:KMP) with a yield of about 7%. Both companies are cornerstone investments held in many investors' income portfolios. Pengrowth Energy, on the other hand, is a growing Canadian oil and natural gas producer mostly off the radar: Pengrowth Energy currently pays investors a monthly dividend of CDN-$0.04 translating into an annual dividend yield of approximately 7% (in US-$ terms and depending on the prevailing CDN-$/US-$ exchange rate at payment date).

Pengrowth Energy reported first quarter results on May 12, 2014. The energy company reported:

  • First quarter average daily production of 75,102 boe/d, down 3% sequentially and 16% y-o-y due to lower natural gas production.
  • Funds flow from operations of CDN-$139.5 million compared to CDN-$105.9 million in the previous quarter (up 32%) and compared to CDN-$147.5 million in the year ago quarter (down 5%).
  • Total capital expenditures of CDN-$233.7 million vs. CDN-$239.7 million in the fourth quarter of 2013 and vs. CDN-$166.0 million in the first quarter of last year. Capital expenditures were largely driven by Pengrowth Energy's Lindbergh commercial project where $127.0 million of Pengrowth's first quarter capital spending went.
  • A net loss of CDN-$0.22 per share compared to a net loss of CDN-$0.17 per share in the previous quarter and a net loss of CDN-$0.13 per share in the year ago quarter.

While short-term results indicate a contraction of production volumes and, with it, a reduction in cash flows, Pengrowth Energy's enterprise value is largely going to be driven by the progress of its Lindbergh project which is assumed to deliver 50,000 bbl/d by the end of 2018 (see ramp-up production plan here).

Pengrowth Energy also provided an update with respect to its Alberta-based Lindbergh thermal development project as part of its first quarter results release:

Progress continued at the Lindbergh thermal project, where all of the major equipment arrived on site during the quarter and two of the three well pads have been drilled.

Lindbergh's two well pair pilot continues to show exceptional results. Combined production from the pilot averaged 1,780 barrels per day (bbl/d) of bitumen during the quarter with an average Instantaneous Steam Oil Ratio (ISOR) of 2.1. Cumulative production from the pilot reached approximately 1.2 million barrels as at March 31, 2014.

Pengrowth has updated cost and schedule estimates for the Lindbergh project. 75 percent of planned capital costs have been incurred to date and Lindbergh remains on time for first steam in the fourth quarter of 2014 and first production in early 2015. Estimates for the total cost of the 12,500 bbl/d first commercial phase of the project have risen approximately seven percent from previous estimates of $590 million to a current estimate of $630 million as the project nears completion.

Pengrowth has updated its internal estimates of reserves at Lindbergh, which suggest it may be able to reclassify a significant portion of contingent resources to total proved and total proved plus probable (2P) reserves (in the range of 70 to 90 million bbls 2P) at Lindbergh. This reclassification would be primarily the result of additional delineation drilling which took place earlier this year and the larger development area associated with the Environmental Impact Assessment application that Pengrowth submitted in December 2013 to expand the thermal project to 30,000 bbl/d. Pengrowth has engaged GLJ Petroleum Consultants Ltd. to provide an independent Lindbergh reserves and contingent resource update prior to Pengrowth's Annual General Meeting on June 24, 2014.

During the first quarter 2014, civil and mechanical field construction continued for the first 12,500 bbl/d commercial phase and is progressing as planned. All major equipment has been set into place. As buildings have been constructed, mechanical, electrical and instrument crews are completing final tie-ins. To date, Pengrowth has drilled 15 well pairs. Drilling of the second of three well-pads is now complete and drilling on the third well pad has commenced. Operations at the pilot project continued to show strong results during the first quarter, with combined field production from the two well pairs averaging approximately 1,780 bbl/d of bitumen. The average ISOR for the pilot in the quarter was 2.1. Since steaming commenced in February 2012, cumulative production from the two well pairs reached approximately 1.2 million bbls of bitumen by March 31, 2014.

Pengrowth still expects the first commercial phase of Lindbergh to be on time, with first steam in the fourth quarter of 2014 and first oil in early 2015. As a result of this increase in capital, Pengrowth is increasing its overall capital spending budget in 2014 by $40 million beyond the previously estimated range of $700 million to $730 million to a new range of $740 million to $770 million.

With Pengrowth Energy steaming ahead and allocating substantial capital to its Lindbergh project, the Canadian Energy company is well on its way to ensure project completion. Pengrowth Energy, for the time being, is committed to hold its current dividend payments steady at a level of CDN-$0.04 and I don't expect an increase in its monthly shareholder dividends any time soon. This, of course, could change when the company has completed the Lindbergh project which should lead to a substantial increase in yearly operating cash flows. Higher than previously estimated reserves could also be a powerful catalyst for Pengrowth Energy's share price.

Conclusion

While first quarter results pointed towards a decline in production and cash flow in the short-term, Pengrowth Energy's value will largely be determined by the successful ramp-up of its Lindbergh thermal development project. Investors seeking an alternative to U.S.-based energy companies with a high dividend yield could consider Pengrowth Energy. Investors need to be aware that dividends are paid in CDN-$ and investors are exposed to exchange rate risk. Long-term BUY.

Source: This Canadian Dividend Champion Should Be In Everyone's Income Portfolio