PENGROWTH ENERGY CORP. $5.90 (Toronto symbol PGF; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 517.7 million; Market cap: $3.1 billion; Price-to-sales ratio: 1.9; Dividend yield: 8.1%; TSINetwork Rating: Average; www.pengrowth.com) produces oil and natural gas in Western Canada and off the Nova Scotia coast. Gas accounts for about 60% of its production; the other 40% is oil.
Rising shale gas production in Canada and the U.S. increased supplies and cut prices from $8.19 per thousand cubic feet in 2008 to $2.38 in 2012. As a result, Pengrowth’s cash flow per share fell 67.1%, from $3.65 in 2008 to $1.20 in 2012.
Due to writedowns and other unusual items, Pengrowth’s earnings have been erratic. Earnings dropped from $1.58 a share (or a total of $395.9 million) in 2008 to $0.32 a share (or $84.9 million) in 2009. Earnings rebounded to $0.76 a share (or $230.3 million) in 2010 but fell to just $0.03 a share (or $12.7 million) in 2012.
New project will boost production
In response to low gas prices, the company is increasing production of oil, which is trading at higher prices. It is now working on its $590-million Lindbergh oil sands project in Alberta. This operation’s first phase should start up in the second quarter of 2015 and produce 12,500 barrels of oil a day. That’s equal to 14.2% of the 87,909 barrels of oil equivalent a day that Pengrowth produced in the second quarter of 2013.
Lindbergh’s second phase should raise its output to 30,000 barrels a day in 2017, while phase three would push that up to 50,000 barrels in 2018. The project’s reserves should last 25 years.
Asset sales cover Lindbergh’s costs
To pay for this project, Pengrowth has sold $1 billion worth of its less-important properties. It will also use some of that cash to pay down its long-term debt, which stood at $1.6 billion, or a high 52% of its market cap, on June 30, 2013.
The resulting lower interest payments will help Pengrowth maintain its $0.04-a-share monthly dividend, which yields 8.1% on an annualized basis. In the latest quarter, dividends accounted for 42% of Pengrowth’s cash flow. However, many investors prefer to receive shares instead of cash. On a cash basis, dividends accounted for 35% of cash flow.
Pengrowth is also expanding its hedging programs, which will help shield it from volatile gas prices. For the second half of 2013, it has hedged 64% of its gas output at $3.33 per thousand cubic feet, which is equal to the current price. Pengrowth has also hedged 43% of its 2014 output at $3.84 and 6% of its 2015 output at $4.06.
Cash flow could jump in 2015
Higher electricity costs in Alberta will probably cut Pengrowth’s cash flow to $1.05 a share in 2013. The stock trades at a reasonable 5.6 times that estimate. Cash flow could reach $1.30 a share when Lindbergh starts up in 2015. The stock trades at just 4.5 times that forecast.
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