Don't Do The Pengrowth Energy Shuffle
- There is now a C$300 million sale that effectively replaces the terminated C$180 million sale.
- This new sale results in the sale of a significant amount of production, yet the annual cash flow guidance has not been adjusted.
- The company is still likely to violate its covenants in the third or fourth quarter without additional property sales.
- Most managements would shelve the expansion of Lindbergh with its WTI $46 breakeven and look for other, lower breakeven projects.
- The stock is still an avoid until a viable future plan appears.
Pengrowth Energy (PGH) management has not improved their outlook with the recent announcement enough to make the stock a consideration. This stock remains a "run the other direction fast" consideration for the foreseeable future. Management announced the collapse of one of the agreements to sell part of the Swan Hills acreage for C$180 million. That important non-achievement was listed far below the top line achievement of selling other properties for C$300 million. That allowed management to "shuffle" sales so that Mr. Market's attention is now focused on the new sale. Time may be getting desperately short for these sales.
But -- and this is a big deal -- this new sale "drew blood" which may be sign of the desperation of management. Plus the stock market reaction was absolutely nothing to get excited about today. The "blood" part:
The Olds/Garrington area assets are expected to generate 2017 average daily production of 13,875 barrels of oil equivalent per day (boe per day), and had Proved plus Probable (2P) reserves of 78 million boe as at December 31, 2016, as per the GLJ Petroleum Consultants independent reserve valuation dated December 31, 2016. The assets include facilities and gathering systems related to the oil and gas properties being sold, as well as the Olds Gas plant.
That is some very serious production numbers for the size of this company. It was very interesting that management has not provided a new cash flow guidance as a result of this sale.
Source: Pengrowth Energy Q1 2017 Earnings Press Release
A significant production sale will most likely affect the above warning. It is very clear from the above that management needed to move fast when it became apparent that one of the Swan Hills deal would collapse. Since commodity prices are lower a second attempt to sell the Swan Hills properties is likely to bring a lower price. If and when the new deal closes (hopefully on schedule this time), the company will have an extra C$100 million. Whether or not that can bring the company into compliance with the lower commodity prices is still another key question management has not answered in the latest press releases. Judging by the timing of the announcements on the latest property sales, the answer may be that more sales are clearly needed.
Source: Pengrowth June 2017 Corporate Presentation
Combine the sales effort with plans to expand the Lindbergh production. As shown above this project has a very high breakeven. In fact, it would lose money at current pricing. Why management would spend any money on such a project during a period of low pricing defies logic. The logic used to justify the project is faulty because many of the unconventional projects noted above are rapidly lowering the costs of new wells. There are far too many improvements sweeping the industry to rely on a chart like this. This project with the breakeven listed above is not competitive with many unconventional projects. Most managements would look at other company prospects during a low commodity price time like this and shelve any Lindbergh talk.
This Lindbergh expansion needs sustained higher pricing for a reasonable return. But management has yet to demonstrate a profit even when prices were higher a few months back. Now commodity prices are sinking below assumptions.
Source: Pengrowth Energy Website - July 11, 2017
The latest press release decreases the production volume range by 2,000 BOED. Other than that, the other assumptions remain untouched so far. But it is clear that the WTI price of $55 and the AECO price of C$3.25 are too high. So the projected funds flow from operations probably will be a missed target. How much time management has to "right the ship" is unclear. That alone is reason enough to watch from the sidelines.
The new sale has not changed production that significantly. But management plans to try to resell Swan Hills. So a potential new guidance without both Swan Hills as well as the current pending sale is indicated. A lower WTI assumption as well as a more realistic AECO natural gas price would help management's credibility. It would help if management were to state the dollar volume of sales needed to remove the covenant warning.
There are a lot of moving parts here. It is very clear that management is scrambling. Management knew this future was possible yet did nothing to prevent the last minute crunch. So even though a bigger sale was announced to replace the sale that did not close, this stock should still be avoided. This management has a ways to go before a viable future can be presented. In fact, a lot more information needs to be available to potential investors before a reasonable assessment can be made.
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