Pengrowth Energy - April 2017

Suite 2100, 222 3rd Ave. SW Calgary, AB T2P 0B4
Phone 403.233.0224  •  Website: www.pengrowth.com
Content updated periodically  • Dated April 24, 2017

Ticker Symbol: PGF-T

View All Posts Tagged PGF-T

FINANCIAL HIGHLIGHTS

Shares Outstanding

547.7M

Market Capitalization

$740M

Q4/16 Actual Production

54,354 boe/d

Enterprise Value

$1.6B

Intermediate Cap Company

Current Price (04/21/17)

$1.35

Attractive Purchase

Under $1.10

Table-Pounding BUY

Under $0.90

12 Month Target

$3.60/share

Bull Market Peak

$10.00/share

BACKGROUND

Pengrowth (PGF) is an intermediate Canadian oil and natural gas producer with over 28 years of operating history. PGF’s asset base provides them with exposure to significant thermal oil, large in-place conventional oil and gas plays, and large Montney resource plays. The company was incorporated in October 2010 and changed its name to Pengrowth Energy Corporation on Dec 2, 2010. Pengrowth is the successor to the trust of the same name which converted from an income trust started in 1988. Management’s current focus is to generate high cash flow while holding down spending and using the excess cash flow and asset sales in non-core areas to lower debt.  Going forward, PGF wants to fund the growth of their thermal assets while maintaining an attractive balance sheet.

INVESTMENT PARAMETERS: PEOPLE

PGF at year-end 2016 had 427 employees at head office and in the field, with a large portion at Lindbergh. Major shareholders include Seymour Schulich with 107M shares. He made this his primary thermal focused oil play after selling out a large position in Canadian Oil Sands (COS) when it was taken over in January 2016 by Suncor.

TitleManagementShares Owned
President & CEODerek Evans1.13M
CFOChris Webster633K
S.VP Production ThermalSteve De Maio142K
TitleManagementShares Owned
VP ConventionalRandy Steele180K
Mgr. Investor RelationsWassem KhalilN/A

Source: www.sedi.ca April 2017

INVESTMENT PARAMETERS: PROJECTS

Pengrowth’s core assets include the Lindbergh thermal oil field, now in phase one of development, Cardium light oil, and Montney natural gas projects. This asset base provides PGF with large oil in-place conventional plays and large lower-risk resource plays with 416K net acres of land.

Lindbergh

The Lindbergh first phase is outperforming its nameplate volumes as the steam oil ratio is 2.3 times versus the forecast of a 4.0 times over the life of the project. At a cost of $650M Lindbergh Phase One came on in Q2/15 and has ramped up to 15,400 boe/d in Q4/16. In Q1/Q2, 2017 PGF will spend $80M drilling seven new well pairs and expanding the associated steaming infrastructure, lifting Q4/17 exit level production to 18,000-19,000 boe/d. By 2020 PGF expects to have thermal production up to 40,000 b/d and have commenced an additional 6,000+ b/d from a joint venture with Koch at Selina, 30km NE of Lindbergh. This should come on stream by 2022.

Montney

PGF sees 8Tcf in-place with 1,000+ drilling locations in the Groundbirch area. The issue here is take away capacity and they won’t see growth in capacity until 2018 when they will obtain up to 18 Mmcf/d of new Nova (TRP) firm natural gas transportation service.

Pengrowth Operating Areas

Pengrowth Energy - April 2017

Source: www.pengrowth.com

INVESTMENT PARAMETERS: FINANCIAL CAPACITY

From over $2B in debt in 2015, PGF’s debt outstanding has fallen to $0.9B currently, after recent asset sale deals closed. On March 17th PGF announced the sale of 4,920 boe/d in their Swan Hills area for $180M and they topped this off on March 23rd announcing the sale of non-producing Montney lands for $92M.

We expect to see further non-core asset sales in 2017. They still have two large non-core assets up for sale. We expect a deal in the order of $250M to occur for the rest of their Swan Hills assets, which had 2016 production of 5,200 boe/d, enabling PGF to finalize the repair of their balance sheet and enable them to return to a growth story. With these additional funds debt should be around $600M by the summer of 2017. An additional possible sale could be their Greater Olds/Garrington – Cardium assets, with 2016 production of 13,352 boe/d – 20% liquids. If this sale occurs an additional $500M could be raised, providing them the capital to accelerate  their thermal and Montney growth plans.

  • In Q4/16 PGF produced 54,354 boe/d with Cash Flow per Share (CFPS) coming in at $0.20 a share as they harvested their very profitable hedge book.
  • The stock is very cheap, trading below Book Value of $2.71 per share at year end 2016 and below our conservative Net Asset Value of $2.75 a share at year end 2016.
  • Our 12-Month Target is $3.60 based upon 9x times (below our Proven RLI of 15.4 years) our Q4/17 annualized cash flow of $0.40 a share. The stock would be a very Attractive Purchase below $1.10/share, and a Table Pounding BUY under $0.90 per share. Into winter 2018-19, if they are successful in lowering their debt load below $500M, the stock could rise to $5.00 a share and be generating over $0.80 CFPS at US$65 WTI.
  • Our 3-5 year Bull Market Peak scenario is for PGF to be producing >60,000 boe/d, have CFPS of >$1.50/share and trade at over $10.00 a share.

Balance of Evidence

POSITIVES

  • PGF has been very successful with its hedge program. Their hedge book is used up for now unless oil prices retreat meaningfully in 2017. They are 58% hedged at C$65.59 per barrel in 2017.
  • The overall corporate decline rate is only 12% so that capital required to keep production flat is fairly low.
  • PGF has two non-core packages for sale: one at Olds with 13,300 boe/d and 5,200 boe/d at Swan Hills, after a recent partial sale. If either of these additional sales occur, their debt concerns will be resolved.
  • Pengrowth has significant upside growth from its thermal operations and from the Montney natural gas business. As they sell assets, production may fall from 54K boe/d in Q4/16 to 42K boe/d if the Swan Hills assets are sold, and to 30K boe/d if the Garrington/Olds assets are also sold. Volumes should pick up to 32K boe/d as Lindbergh lifts production late this year to over 18K boe/d. By 2020, PGF should be back to producing over 60K boe/d and should justify a much higher CFPS multiple as their long life assets support this view.

ISSUES OF CONCERN

  • PGF had 1,375 net wells that were non-producing at the end of 2016. They have lowered this count with the partial Swan Hills sale and expect to lower this further with the additional sales in 2017.
  • Once the debt to cash flow ratio declines to the 2:1 level, they can restart their growth program with activity moving forward on Lindbergh Phase Two and conventional oil and natural gas developments.
  • PGF has only a small amount of their natural gas hedged in 2017. Only 4% is hedged at a price of $3.46/mcf. We wish they had taken advantage of the strong winter pricing in Dec/16 to lock in over 50% of 2017 production. This is the main reason why our cash flow estimate for 2017 is below the company’s forecast.
  • PGF needs to tie down takeaway capacity for their Montney natural gas if they are to see material growth in this core area over the next 3-5 years. Alliance and TransCanada Corp. are planning more takeaway capacity and we hope PGF locks in some of this new build capacity.

PENGROWTH ENERGY CORPORATION (PGF-T)

Pengrowth Energy - April 2017

Source: stockcharts.com

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