The question is whether you can trust this oil and gas producer after it slashed its monthly dividend from 7 cents a share to 4 cents — dropping from a yield of over 11% (7 cents x 12 months / $7.50 a share on July 6 before the cut) to just 7.4% currently (4 cents x 12 months / $6.50 a share or so currently).
The short answer: I wouldn’t buy Pengrowth now. If you’re bottom-fishing for a natural gas exploration stock, you can do better. And if you’re buying Pengrowth Energy for the dividend … well, you’re a fool.
For starters, let’s look at the company’s operations and growth prospects.
Pengrowth is an energy exploration company that drills in Canada for oil and natural gas. Anyone who knows anything about energy prices knows that while natural gas prices may be firming up recently, they’re still significantly below 2011 levels and remain at levels not seen since the early 2000s. There’s a glut of supply, and that’s not good for many natural gas stocks, Pengrowth included.
Thus, earnings and sales have evaporated. In 2008, it did gross profit of almost $1.1 billion on almost $1.8 billion in revenue. Last year, it did less than $800 million in profit on just over $1.1 billion in revenue.
Since the company can’t grow its business in this environment, Pengrowth decided to try expanding by buyout. Despite a mere $2.2 billion market cap, it attempted to acquire competitor NAL Energy in a $1.9 billion deal a few months ago. The move wasn’t exactly well received — and shares are off almost 40% since the March announcement.
Worst of all for dividend investors, Pengrowth has overextended itself, leading to the recent dividend cut from 7 cents monthly to 4 cents monthly. The shares are down 8% in about three weeks since that news.
None of that bodes well for the company. Yes, I suppose a dividend yield of over 7% currently is attractive … but it’s clearly unsustainable. Aside from the recent cut, there’s the question of simple math. At 4 cents monthly, the dividend equals 48 cents per share each year. Fiscal 2011 earnings per share were just 25 cents — and the high earnings forecast among the few analysts watching this stock is a mere 14 cents for fiscal 2012.
Where is that dividend coming from? The company has zero cash in the bank, so certainly not from a war chest.
It all adds up to a very dumb dividend play.
If you want to chase natural gas in exploration stocks, I suppose a gamble on Pengrowth makes sense. However, I’d encourage you to focus on more profitable and successful nat gas players that include Chesapeake Energy (NYSE:CHK) or Devon Energy (NYSE:DVN). I haven’t done the number-crunching on either of these recently, but they have always been at the head of the class.
If you want yield in the nat gas space, consider Cheniere Energy Partners (AMEX:CQP). This master limited partnership (MLP) will begin commercial operations on a first-of-its-kind, $10 billion U.S. liquefied natural gas export plant in Sabine Pass, La., that may literally be the only way for many natural gas producers to get their exports out of America. CQP will collect a toll for passing on the gas, and deliver a powerful dividend of around 7% as a result.
My advice is to not mess with Pengrowth. Especially if you’re after yield, because this dividend cut may be the first of many.
And frankly, I wouldn’t mess with much of the natural gas space unless you’re content making a longer-term play on prices firming back up — and that requires research (or at least, a whole other article from me on the topic).
Do you have a stock that’s on your mind? Drop me a line at email@example.com, and I’ll take a look at it.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.