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Summary

  • The fall in the stock price since the start of July has reversed the gains recorded during the previous three months.
  • Lindbergh will have the capacity to add 50,000 barrels per day within the next five years and substantially increase the production volumes of the company.
  • Reserve update at the Lindbergh project has increased the value of the project from $1 billion to $2.2 billion.

The most important factor in growth for small energy players like Pengrowth (NYSE:PGH) is the ability of the company to acquire and assemble a good portfolio of assets - the development of these assets is the second most important factor and it shows the ability of these small energy players to get the best out of its assets base. Companies like Pengrowth focus on a specific region or segment and try to get the best out of its acquired assets. Pengrowth's price has been volatile over the last few months and the stock has recorded a small loss [0.69%] year-to-date. The decline is mainly due to currency risks associated with the company earnings.

The chart shows a steep decline in the stock price since the start of July, which has reversed the gain recorded by the stock over the last three months. However, the company is making solid moves to enhance its future funds flows and free cash flows. Moreover, the Lindbergh project will help the company enhance its revenues along with future cash flows. Pengrowth also offers an impressive yield of 7%, with annual dividend close to $0.44 per share, which helps the stock attract income investors.

Lindbergh Project will be A Strong Growth Drivers

Pengrowth started the Lindbergh project in 2012 located in the Cold Lake area of eastern Alberta - the project demonstrated strong competitive steam/oil ratios and well productivity. This project offers huge growth potential to the company with an estimated annual production of up to 50,000 barrels per day within five years. Low expected decline rates, long reserves life and increased production output will support company's planned growth model. Further, the company is consistently delivering the promised growth and reported improved results from its Lindbergh and Cardium pilot testing.

During the second quarter, the operations at Lindbergh pilot project reported strong operational results with combined field production results from the two well pairs averaging approximately 1,640 barrels per day of bitumen. Moreover, the company announced that GLJ Petroleum Consultants (GLJ) have provided a reserves update of bitumen for its Lindbergh project which substantially increased its value from $1.0 billion to $2.2 billion. GLJ has attributed 101 MMbl of 1P reserves and 229.7 MMbl of 2P reserves to the Lindbergh project. The additional proved reserves throughput at the Lindbergh project represented an increase of 24% from December 2013 results, while 2P reserves increased by around 61% during the first half of the year.

(click to enlarge)

Source: News Release, Company Website, June 24, 2014.

The Lindbergh pilot also continues to surpass type curve expectations, reporting an average production of approximately 1,785 bbl/d, and an instantaneous steam oil ratio of about 2.4 in the month of June, 2014. There are two effective methods to estimate reserves and production rates of natural gas and oil wells and to further validate the results of such complex reservoirs: Decline curve analysis and type curve analysis. However, decline curve method is easy to use, but type curves usually provide better forecasts for complex reservoirs. The usage of type curves analysis methods verified the production and economic benefit to the company via Lindbergh Thermal project.

Further, the project is near to its completion and the company has maximized transportation optionality at Lindbergh by entering into a 10 years take or pay transportation agreement with Husky Energy for access to its Alberta Gathering System. For this, the company will develop a 15 km pipeline and related meter stations from the Lindbergh facilities which are expected to be completed by the second half of 2015. The Husky gathering system will further enhance the Lindbergh revenues due to its connectivity to export pipelines through Enbridge's (NYSE:EEP) Mainline, Spectra's Express pipeline, both the existing Keystone pipeline and future Keystone XL pipeline and several others major pipelines in the region.

Conclusion

As the completion date of Lindbergh Polar project is coming closer, we are expecting strong growth in production and revenues for the company. Moreover, the company is consistently delivering the promised growth and reported improved results from its Lindbergh ilot testing. The project is by far the company's best growth prospect and significant increase in profitability is expected from it. We believe Pengrowth is a solid long-term investment and the recent decline in the stock price will prove to be short-term.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Source: Lindbergh Project Will Be A Major Growth Driver For Pengrowth