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We are discontinuing coverage on Pengrowth Energy due to a reallocation of resources. Accordingly, all prior research ratings, price targets, and earnings estimates must no longer be relied upon.
Pengrowth Energy
Second quarter results were in line to slightly ahead of both our estimates and the consensus. With continued success in terms of cost reductions, Management has reduced operating cost guidance for the year, which will lead to increased financial flexibility to help manage 2017 debt maturities. Given the pullback in commodity prices, Management noted the potential for covenant violations in 2H17 should current strip pricing playout, which could weigh on the stock over the near-term. Despite positive moves to our cash flow forecast, we have maintained both our $2.50 per share target price and Market Perform ranking in light of a deteriorating futures strip outlook.
Impact - slightly positive given second quarter results that were in line to slightly ahead of expectations, while operating cost guidance for the year has been reduced leading to increased financial flexibility exiting the year
Impact: Neutral. As anticipated, Phase II of Pengrowth's Lindbergh project has received EPEA approval which allows for annual average production above the Phase I nameplate capacity of 12,500 bbl/d.
Pengrowth’s first quarter financial results were in line with the consensus estimates, although came in ahead of our cash flow estimate as a result of royalties and operating costs that were lower than we had forecast. Management reiterated its 2016e capital expenditure and expense guidance, although has trimmed production guidance by ~3,000 boe/d at the midpoint largely due to minor disposition activity in the first quarter. Notable was a $173 mm decrease in total debt compared to year-end aided by a favorable foreign exchange revaluation on the Company’s US denominated debt, while further reduced by cash flow that outpaced capital spending. Following first quarter results, we have realigned our target price to $1.75 per share and have maintained our Market Perform ranking.
Pengrowth reported first quarter results including production of 62,056 boe/d that was in line with our 62,658 boe/d estimate along with the consensus estimate of 62,298 boe/d. The reported cash flow of $106.2 mm or $0.19 per diluted share was also in line with consensus ($0.19 per share), although ahead of our estimate of $94.8 mm or $0.17 per diluted share as a result of lower royalties and operating costs than we had forecast.
Impact - neutral given the size of the transaction, the proceeds of which are already included in our forecast.
Pengrowth’s year-end financial results came in as expected and within Management’s previously announced guidance range. Management reiterated its 2016e guidance that was previously provided at the Company’s annual investor day in late January as detailed in our Facts dated January 22, 2016. Recall, at that time the Company also announced the suspension of its dividend. Year-end reserves were down in the PDP and 1P categories, reflecting disposition activity and the impact of economic factors, although were up modestly on a 2P basis benefiting from reserve additions on the Company’s Lindbergh and Montney projects. With only minor changes to our forecast, we see no reason to revise our $1.25 per share target price or our Market Perform ranking, noting our target 2017e EV/DACF remains unchanged.
Impact - neutral with year-end financial and operating results and reserves largely in line with expectations, while there was no changes to Management's previously announced guidance
Pengrowth ended 2015 with production in line with expectations on slightly lower than anticipated capital spending. In light of current commodity prices, Management has eliminated the quarterly dividend, which will save the Company ~$22 mm annually, although will likely lead to near-term pressure on the stock. Efforts continue on the Company’s $600 mm non-core asset sales process, with $263 mm closed in 2015 and another ~$40 mm expected to close in 1Q16e. Formal 2016e guidance will see $60-$70 mm of capital spending to average 59,000- 61,000 boe/d, with excess cash flow used to pay down debt.
Impact: Neutral to slightly negative given elimination of the dividend and scaled back operations, although in light of current commodity prices and the Company's debt position we view this as a prudent move to ensure the longer term sustainability of the business.
Pengrowth announced its third quarter results with production that was in line with both our thinking and the consensus, while cash flow came in slightly ahead of our estimate and the consensus estimate. The Company’s Lindbergh project continues to ramp up as expected with no change to the anticipated exit rate of ~16,000 bbl/d, while total corporate guidance is also unchanged calling for a capital program of $190-$200 mm and average annual production of 70,000-72,000 boe/d.
Impact: Neutral to Slightly Negative as the notice served will not offer any positive sentiment for the stock. Pengrowth announced that it received notice on October 29, 2015 that it is no longer in compliance with one of the NYSE's continued listing standards as the common stock was less than US$1.00 per share over a consecutive 30 trading day period. As of October 28, 2015 the average closing price of Pengrowth's stock was US$0.99 per share. The Company has a period of six months to regain compliance with the NYSE's price listing standard to avoid delisting, which would require a closing price and 30 trading day average of at least US$1.00 per share on the last trading day of any calendar month.
Following the announcement just over two weeks ago that the Company had inked a deal to sell its Bodo property, Pengrowth has followed up with a second transaction, this time selling its Jenner area properties in south eastern Alberta for cash consideration of $80 mm. While the Jenner disposition was completed at below average metrics, in our view the transaction is a necessary step towards strengthening the Company’s balance sheet and improving its financial flexibility.
Impact: Neutral to Slightly Positive. Although the Jenner disposition was completed at below average metrics, in our view the transaction is a necessary step towards strengthening the Company's balance sheet and improving its financial flexibility. Pengrowth further noted year-to-date expected proceeds from its non-core asset disposition program have grown to over $300 mm, representing ~50% of the Company's 2015e $600 mm target.
Pengrowth announced it has entered into an agreement to sell its non-core Bodo property in eastern Alberta for cash consideration of $95 mm, bringing the total tally for anticipated proceeds year-to-date to $260 mm from its non-core disposition program, thus taking yet another important step towards strengthening the Company’s balance sheet and improving its financial flexibility.
Impact: Neutral to Slightly Positive. Year-to-date expected proceeds of $260 mm from Pengrowth's non-core asset disposition program, including the Bodo transaction, are another step towards strengthening the Company's balance sheet and improving its financial flexibility.
Pengrowth has revised its dividend policy to a quarterly payment of $0.01 per share (or $0.04 per share annually) from a monthly payment of $0.02 per share (or $0.24 per share annually), while also suspending its DRIP, effective for its initial quarterly payment in December 2015. Based on the Company’s most recent closing price of $1.65 per share, Pengrowth’s new dividend payment is equivalent to a 2.4% yield.
Impact: Positive. Although we would anticipate an initial negative response to Pengrowth's dividend cut, in light of a depressed commodity environment, we view these steps as a prudent move to help accelerate the Company's debt reduction initiatives.
Pengrowth reported second quarter results highlighted by production that was in line with our estimate and the consensus, while cash flow fell just short.
Impact: Slightly positive. Production ramp-up at Pengrowth's Lindbergh thermal project appears to be ahead of our forecasts for 2Q15e and for the balance of this year given current production of 14,400 bbl/d and a corresponding iSOR of 1.99x which is equivalent to 0.9x its year-end 16,000 bbl/d production target. Further, the Company reiterated its intention to dispose of $600 mm of non-core assets by year-end to help reduce corporate debt levels.
Impact: Slightly Positive. Pengrowth's ramp-up at Lindbergh continues to be strong at 13,000 bbl/d with an ISOR of 1.9x, and appears to be in line to slightly ahead of our current forecast for 2Q15e-4Q15e, which ultimately expects production to reach 16,000 bbl/d of bitumen by year-end.
Factoring in a modestly delayed commercialization date of April 1, 2015 for Pengrowth’s Lindbergh project (originally January 2015), the Company’s 1Q15 financial results were reasonably in-line with our original thinking. Further, the Company elected to monetize a portion of its foreign exchange hedge positions in the period, resulting in $84 mm of proceeds that was used to reduce outstanding debt leading to total debt levels of $2.2 billion exiting the quarter, which was 2% below our forecast.
Impact: Slightly positive. Factoring in a modestly delayed commercialization date of April 1, 2015 for Pengrowth's Lindbergh project, we view the Company's 1Q15 financial results as reasonably in line with our original thinking. Although the Company has revised its 2015e production guidance down ~4% as a result of the commerciality delay, a non-core asset disposition, and uneconomic well shut-ins, with a concurrent $30 mm increase to capital spending for expanded scope/Phase II projects at Lindbergh, we believe the market will focus on Lindbergh's impressive ramp-up to date that has current volumes at ~10,500 bbl/d of bitumen, or ~65% of the 16,000 bbl/d that the project is expected to reach by the end of the year.
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