Pengrowth Energy: A Tough Investment Decision?

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Through nearly all of 2012, Pengrowth Energy (NYSE: PGH) had been trading in lock step with the cost of oil and natural gas. Nevertheless, this is not the case anymore. From mid September, the company has witnessed its stock value gradually fall, from around $7.00 towards its present value at around $4.00.

On January, 2013, the company declared that it was confirming its first phase of the Lindbergh Thermal Project. This particular project is definitely a massive risk for Pengrowth, since its capital related expenditure happen to be an enormous $450 million for the first phase merely. Listed below are some explanations why Pengrowth is going after this strategy:

  • Prior to decreasing the dividend, Pengrowth would probably sell assets as well as minimize capital spending.
  • Pengrowth is planning to shift away from natural gas & light oil market segments and change to thermal oil, that has far cheaper costs as well as cheaper maintenance expenses.
  • Pengrowth is planning to finance Lindbergh using asset sales and doesn't intend to issue equity or debt.

It is apparent that the energy producers in Canada are presently realizing more affordable costs than previously. Recently, in fact, the spread among West Texas Intermediate and Western Canadian Select has been a tremendous $25. This particular spread is estimated to remain until the necessary pipeline structure is constructed. I believe that Pengrowth is carrying out the plausible solution by going after Lindbergh. It doesn't make business sense, at present prices, to generate natural gas and light oil in Canada.

This price spread, on the other hand, has been around for quite a while. Actually, it continues to be decreasing recently. This situation invokes the particular issue: Why has Pengrowth dropped so much lately?

Sadly, I don't possess the response to that problem. What I actually do realize is the fact that this company is currently trading at a ridiculous low cost regarding its NAV (net asset value). As of the third quarter of 2012, Pengrowth had about $1.6 billion in debt and above $5.9 billion in natural gas and oil assets.

This brings to a complete net asset value of $4.3 billion. Pengrowth at the moment possesses around 507 million shares outstanding. Making the division of the net asset value of $4.3 billion by the present quantity of shares of 507 million results in a net asset value of $8.48 for each share. Considering that the stock is at the moment trading at around $4, this conducts to a surprising discount to net asset value of 53%.

Precisely how did Pengrowth get such large number of assets? Through more beneficial times, the company was an ambitious purchaser of gas and oil assets in Canada. For this reason, Pengrowth currently possesses a large range of expensive, non-core assets. Pengrowth, as of the third quarter 2012,  had approximately 434 million barrels of oil equivalent (BOE) of reserves, 94 thousand BOE/day of production having a 47% gas/53% liquids mix, and above 1.4 million acres of underdeveloped territory.

Could be the value of $5.9 billion too large for the predicted 434 million BOE of proven as well as possible reserves? To resolve this, we initially have to observe how much this really is for each BOE. Simply by dividing $5.9 billion into 434 million BOE, we get to the price of $13.60 for each BOE. By having this number, now we are allowed to take a look at a few other points:

  • Through the third quarter of 2012, Pengrowth reached an average price of $44.73 for each BOE.
  • Enerplus Corporation (NYSE: ERF) sealed the purchase of crude oil assets in Manitoba on Nov. 1, 2012, for $216 million which includes approximated closing alterations. This specific selling price displays value metrics of around $135,000 per flowing barrel and also $25.70 for each BOE of reserves.
  • Penn West Petroleum (NYSE: PWE) declared its objective to divest of $1.0 to $1.5 billion associated with non-core assets. Typical transaction metrics had been around $103,000 per flowing barrel as well as around $19 for each BOE of reserves.

Much like Pengrowth, Penn West and Enerplus additionally work in Canada. Looking at these previous asset sales, it is possible to determine that the $5.9 billion value is actually a reasonable value for the company's assets. Nevertheless, considering the 53% price cut that Pengrowth has currently experienced, this brings to an alarming small value of $6.39 for each BOE of reserves.

The Bottom Line

Pengrowth is going to be revealing its fourth quarter and also the entire-year of 2012 final results in the beginning of March. I believe that Pengrowth must think about its strategic solutions, such as the conceivable sale of the whole organization. Pengrowth stock's market price is not rational anymore taking into account its net asset value and also present yield. The fact that the reserves belonging to Pengrowth are presently just valued at $6.39 for each BOE is really a distortion.

Marcus Vilkas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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