Pengrowth Cuts a Start, but Not Enough

Sep.18.07 | About: Pengrowth Energy (PGH)

Pengrowth Energy Trust (NYSE:PGH) reduced its monthly distribution on Friday after market close, but according to UBS analyst Grant Hofer, the 10% cut wasn't deep enough.

Pengrowth's October distribution is set for C22.5¢ per unit compared to monthly distributions of C$0.25 per trust unit for the first three quarters of 2007.

As a result, Pengrowth's estimated 2007 distributions are expected to fall from C$3 to C$2.925 per unit. while the implied ratio declines from 92% to 90%.

"Although we believe this move is prudent, we are still calling for lower distributions of C$2.52 per unit in 2008 (a further 7% reduction), and C$2.04 per unit in 2009." Mr. Hofer said in a note to clients, adding at current levels, the trust's distributions do not leave enough capital for the trust to adquately reinvest in its assets.

Pengrowth's unit price probably already reflects the distribution cut, Mr. Hofer also told clients, given distributions represent a cash yield of 16.9% compared with 12.3% for the energy trust group on average.

The analyst said, however, that he expects some downward movement on units near term following the news. And sure enough, shares in Pengrowth were down slightly Monday afternoon, shedding C$0.13 off of Friday's closing price of C$17.74.

Mr. Hofer maintained his "neutral" rating, and left his C$16.75 price target unchanged.