Today, Pat McKeough looks at a junior energy stock in response to a Member of his Inner Circle who wants to know if this company’s dividend is sustainable. Twin Butte Energy is an oil and gas producer with its major properties grouped along the Saskatchewan/Alberta border, with 88% of its production in oil. In spite of falling output and lower oil and gas prices, the company still managed to raise cash flow in its latest quarter, thanks largely to a hedging strategy. Even so, Twin Butte cut its monthly dividend by 70%. The reduced dividend yields a high 11%, and Pat assesses whether the new dividend is sustainable in the current environment for energy prices. 

Q: I have some Twin Butte Energy stock that I bought at $0.85 to $1.50 because it paid a high dividend. Is this dividend sustainable? Will the shares come back when oil prices return to normal, or should I sell them and look for something better?
 
A: Twin Butte Energy (symbol TBE on Toronto; www.twinbutteenergy.com ) produces oil and gas in Western Canada, with a focus on the greater Lloydminster area along the Alberta/Saskatchewan border. 90% of the company’s production is focused on two areas, the Provost medium oil region and the Lloydminster heavy oil region.

Its output is 88% oil and 12% gas.

In the three months ended June 30, 2015, Twin Butte produced 17,351 barrels of oil equivalent a day, down 17.8% from 21,109 barrels a year earlier.

But even with the lower output and falling oil and gas prices, Twin Butte’s cash flow rose 17.4%, to $57.0 million, or $0.16 a share, from $48.5 million, or $0.14. That’s because it realized a $25.3-million gain on its hedging strategy: for the second half of 2015, it has hedged about 6,000 barrels a day at $80 U.S. (compared to today’s market price of $42), and in 2016, it has hedged 1,000 barrels a day at $65.

Energy stocks: Twin Butte’s debt very high in relation to sharply reduced market cap

Twin Butte recently cut its monthly dividend by 70.0%, to $0.003 from $0.01. But even with the reduction, the stock yields a very high 11.0%. That yield is likely sustainable in the short term, but a further cut is possible if oil and gas prices stay low and as the company’s hedges expire.

Meanwhile, Twin Butte’s long-term debt of $304.1 million is a very high 2.5 times its $122.1-million market cap—although that market cap is way down along with the company’s share price and those of most other oil and gas producers.

Twin Butte is okay to hold, but only for highly aggressive investors.

Inner Circle recommendation: HOLD for highly aggressive investors.

For an energy stock that we see as a good value, read Takeovers add to Crescent Point Energy’s growth potential when oil recovers. For an oil services stock we believe is well-positioned for an energy rebound, read High-quality rigs give Precision Drilling first crack at a rebound.

Do you think it’s time to bail on all oil and gas stocks and buy back in later, or are you hanging on to some energy stocks?