Oil Stock Watch: Is A Dividend Cut Coming From Pengrowth?

Jun.21.12 | About: Pengrowth Energy (PGH)

Pengrowth Energy Trust (NYSE:PGH) provided a detailed presentation of its Lindbergh SAGD project to analysts Monday afternoon. The company addressed the geology, the anticipated timeline and the projected cost of its Lindbergh development. The company is targeting first steam for Phase I in 4Q14, with a production ramp-up in 2015. Phase I is expected to reach peak production of 12,500bbl/d. The 17,500bbl/d Phase II is projected to start steaming in 2Q16, with production expected to ramp up in 3Q16.

The Lindbergh project offers significant background and location cost advantages in the Cold Lake area in comparison to similar scale projects in the Athabasca oil sands region. The asset provides all season access, limited muskeg, roads, power and natural gas supply all in close proximity to the site, apart from its ability to not rely on expensive Fort McMurray contractors and service providers.

The Lindbergh site also has a history of production from the Lloydminster formation through Cyclic Steam Simulation from the early 1970s to the early 1990s - which reached a peak rate of 2,500 bbl/d from 52 wells in 1987. Pengrowth highlighted that the emulsion and well deliverability issues encountered by Murphy can now be largely mitigated by improved diluent blending and SAGD treating chemicals.

In addition, SAGD yields a far higher recovery factor in excess of 50% as compared to CSS technology yielding recovery factors of 25-30%. Furthermore, heavy oil prices and the heavy oil to gas ratio have become substantially more stable and attractive since Murphy originally pursued CSS, improving the economic feasibility of applying SAGD technology to the asset.

The geology of the Lloydminster formation at Lindbergh is highly amenable to SAGD exploitation, which is characterized by high porosity (35%), permeability of 4 darcies, favorable viscosity, low reservoir barriers or shale breaks, heavy oil impregnation and strong heat transfer due to the 500 m depth of the formation.

The company currently has 132 core holes and anticipates having 150 by time of sanctioning of the first commercial phase of the project, providing strong well control across the Lindbergh area, which will limit geological risk with implementation of the commercial phases of the project.

The company's first long lead-time capital commitment is expected in 1Q13 when ~$150m of equipment will be ordered. Given that $450m is projected to be spent before first production, questions were asked about the funding of Lindbergh. Pengrowth stated that it is still looking for a potential JV partner, but will also consider cutting capex, reducing the dividend, selling assets or raising equity.

Given Enerplus's (NYSE:ERF) recent move to slash it's dividend by 50%, we feel Pengrowth (PGH) and Penn West (NYSE:PWE) are likely to follow given the recent decline in oil price. Another key factor in analyzing whether to buy, sell or hold Pengrowth is their recent drilling results, which are detailed in our review of Western Canadian drilling results. In reviewing the recent drilling results from the provincial registries, you will see that the company is having a lot of success in the Beaverhill Lake play in Alberta.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.