Pengrowth Energy Stock Outlook Clouded by Debt, Heavy Oil Focus

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Shares of Pengrowth Energy Corporation (TSE:PGF) nearly doubled in price recently after Seymour Schulich boosted his stake in the Company

SmallCapPower | October 11, 2017: Pengrowth Energy Corporation (TSX:PGF) is an intermediate Canadian oil and natural gas producer with over 28 years of operating history. Shares of Pengrowth Energy have doubled from the levels of $0.72 to reach $1.50 during the past month, currently trading at $1.36 as of October 10, 2017. There has been no news from the Company to explain this. Indeed, Pengrowth Energy even put out a press release noting that they are not aware of any material undisclosed information that would account for this trading activity. This share surge can likely be attributed to billionaire Canadian investor Seymour Schulich, who increased his stake in the Company from 19% to 24% recently, as well as the recent sale of the remaining Swan Hills assets in North Central Alberta for $150 million in September 2017. As for the rational for the sale, Pengrowth Energy has been shifting its focus towards heavy oil production largely via its thermal Lindbergh project. Pengrowth Energy 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.

Investment Thesis

  • Barbell Strategy for Sustainable Growth
  • Shifting focus towards heavy oil production largely via Thermal Lindbergh Project

Barbell Strategy for Sustainable Growth

Pengrowth’s current assets consist of an even balance between oil and gas as well as thermal and conventional assets. This balance allows for flexibility in fluctuating market conditions by providing commodity and capital optionality.

Shifting focus towards heavy oil production largely via Thermal Lindbergh Project

Its Lindbergh thermal property, the cornerstone strategy to becoming a sustainable energy producer, is currently in development. Lindbergh is located in East Central Alberta, away from the high-cost Fort McMurray area. Pengrowth Energy is developing this niche opportunity, which is expected to provide the Company with a low decline, long life production profile requiring much lower sustaining capital than conventional or other unconventional opportunities.

Financial Analysis

Second-quarter average daily production decreased 13% compared to the prior-year period, mainly due to property divestments combined with natural declines and maintenance-related downtime.

Funds flow from operations in the second quarter decreased 67% compared to the same period last year, primarily driven by lower realized commodity risk management gains and lower production volumes, partly offset by higher realized prices and lower interest and financing charges.

Second-quarter 2017 capital expenditures of $36.7 million were focused primarily on its Lindbergh thermal project. Inclusive of maintenance capital, Lindbergh capital expenditures in the quarter were $30.6 million and focused primarily on Phase 1 optimization and maintenance activities.

Outlook

Since the start of 2017, Pengrowth Energy has closed $995 million of asset sales to substantially reduce its debt. Even after the recent sale in September, the Company’s debt level is about $900 million, which is still alarming. Through the sales of the conventional assets, Pengrowth Energy is banking much of its future growth on heavy oil production largely via thermal Lindbergh project. From the recent second quarter results, it is important to note that management has still not suggested a profitable way to expand the thermal business, which has not made money to date.

Additionally, Pengrowth Energy has got relaxation on its existing covenant ratios for a period up to, and including, the quarter ended September 30, 2019. This is good news for the Company and can help aggressively expand its Thermal business to produce decent cash flows. If Pengrowth Energy fails to capitalize on this relaxation and ends up incurring losses, more asset sales could be possible post 2019 to pay down the debt. So investors might be best to avoid the stock until management presents a valid future plan on how it can make money from the Thermal business.

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