Weak natural gas prices have hurt oil and gas producers with a high gas component. In June 2012, the price of gas dropped below $2 U.S. per million British thermal units (BTUs). That was the lowest price in over 10 years, and down 87% from an all-time high of $15.40 in December 2005. High inventories and record-warm temperatures were the main reasons for the price decline. Gas has since risen to around $3.37.
The long-term outlook for natural gas is positive, although in the short term, shale gas discoveries continue to rapidly increase supply. That’s keeping prices low. Shale gas is natural gas that is trapped in rock formations. To extract it, companies must pump water and chemicals into the rock. This fractures the rock and releases the natural gas.
Today we’ll see how that is affecting one of the energy stocks we cover in our newsletter for safety-conscious investors, Canadian Wealth Advisor.
BONAVISTA ENERGY (Toronto symbol BNP; www.bonavistaenergy.com) explores for oil and natural gas in Alberta, Saskatchewan and B.C. Bonavista’s production is weighted 61% to gas and 39% to oil.
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Bonavista cuts dividend but maintains yield of better than 6%
In the three months ended September 30, 2012, the company’s cash flow per share fell 42.9%, to $0.48 from $0.84 a year earlier. Gas prices declined by 38.0%, to $2.56 per thousand cubic feet from $4.13. Production also dropped 8.6%, to 65,464 barrels of oil equivalent per day (including gas) from 71,636 barrels.
Bonavista has cut its monthly dividend by 41.7%, to $0.07 from $0.12. That will help the company conserve cash to invest in its exploration and development program.
The new annual rate of $0.84 a share still yields a high 6.3%. The company’s long-term debt of $755.3 million is a reasonable 31.4% of its $2.4-billion market cap.
In the latest issue of Canadian Wealth Advisor, we examine whether Bonavista’s forecast cash flow will be sufficient for the company to avoid further cuts in its dividend. We also look at what kind of oil and gas stocks safety-conscious investors should buy. We conclude with our clear buy-hold-sell advice on this stock.
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