Pengrowth: Inside The Recent Asset Sale

by: Albert Alfonso

Pengrowth agrees to sell the rest of its Swan Hills assets for C$150 million.

This is the second time Pengrowth has agreed to sell this asset after the first transaction was terminated.

This is some good news for the stock as it means more cash for debt repayment and the Lindbergh project.

Pengrowth (PGH) just announced an agreement to sell its remaining Swan Hills assets in North Central Alberta for C$150 million. Back in March, the company had previously entered into an agreement to sell these assets for C$180 million. However, that transaction was terminated after the buyer failed to secure funding.

The details

Pengrowth's Swan Hills assets are located in North Central Alberta and are currently producing around 5,060 bpd and with 31 million BOE of 2P reserves. This is mostly light oil and NGL production with a 82% liquids mix.

Pengrowth will receive C$150 million in cash. Coupled with the initial C$18 million deposit collected from the first buyer, the total consideration is around C$168 million. Closing is expected for sometime during Q4 2017.

Keep in mind that Pengrowth already completed a C$185 million transaction for the other half of its Swan Hill position. Combining these two results in total proceeds of C$353 million for the entire Swan Hills position. This compares to the C$596 million PV10 value as of the end of 2016.

Why is Pengrowth selling assets?

As for the rational for the sale, Pengrowth has been shifting its focus towards heavy oil production largely via its thermal Lindbergh project. Lindbergh's production, while expensive upfront, has very low decline rates and requires much less maintenance capital compared to conventional light oil. In essence, the light oil production in Swan Hills has become a legacy non-core asset. While it does provide decent cash flows at current oil prices, Pengrowth is not really in the position to put the necessary capital to expand or even maintain production in that area.

Instead, Pengrowth is banking its future success on Lindbergh. Currently producing ~15,000 bpd, Phase 2 of Lindbergh is set to increase production up to 40,000 bpd.

The big hurdle of course remains funding. The cash proceeds from the Swan Hills asset will be useful on this front, though Pengrowth will need to first settle some of its covenant issues. However, as noted in the linked article, Pengrowth is very close to securing waivers for its debt covenants.

Final Thoughts

Lastly, some might wonder why Pengrowth was only able to sell these assets for C$150 million if the initial sale was for C$180 million. I would imagine most if not all this variance has to do with the stronger loonie and weaker dollar-- the exchange rate (USD/CAD) is now at 1.21x versus 1.35x back then. As these rates, the March transaction was for $135 million versus $123 million now. Add back the C$18 million deposit ($15 million) and you are basically at the same price in dollars.

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Disclosure: I am/we are long PGH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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