Pengrowth Energy Corporation, a mid-sized Canadian oil and gas producing company, is swimming in a toxic sea of losses. The only thing remedy, a return to higher world oil prices.
Oil is a non-renewable resource. When it is used up, it’s gone. Consumption of fossil fuels is at the heart of climate change. If we do not curtail our use of fossil fuels, we risk permanently damaging the world’s climate.
Despite dire warnings like these and despite constant examination by the financial industry, an apparently unforeseen global glut of oil supply arrived about eighteen months ago. And, oil prices dropped. Precipitously. Not surprisingly, the profitability of Canadian oil production companies dropped too.
In September 2014 Pengrowth was getting almost $105 per barrel of oil. At that price, in three month from July to September, 2014 the company made a profit of just over $133 million. Life was grand. But, those halcyon days are gone. At least for now.
By September 2015 Pengrowth was getting just $61 per barrel of oil. At this new price – 42 percent lower than the previous year – July to September, 2015 the company lost almost $340 million. Gulp. This is the number that pops off the page of the 2015 third quarter financial report. That is a profit/loss swing of almost half a billion dollars.
If this loss rate of $340 million per quarter were to continue, Pengrowth would lose over $1 billion per year – the total amount of credit they have available.
Pengrowth’s results for the last three months of 2015 have not been released but things may get even worse. The price of oil has declined to $47 per barrel as of January 29, 2016. Now 59 percent lower than the glory that was September 2014. Uh oh.
Success in business is pretty simple. If revenue exceeds costs you are a success. If costs exceed revenue, losses pile up and you eventually go bankrupt. Pengrowth urgently needs to increase revenues and decrease costs.
CIBC business analyst Jeremy Kaliel notes that Pengrowth has increased short term revenue by selling assets. The company sold assets in 2015 that brought in $263 million. Further deals already made will see another $37 million by March, 2016.
In a news release on January 21, 2016 Pengrowth President and Chief Executive Officer, Derek Evans, notes that the company intends to sell more assets worth another $300 million sometime in 2016. There is nothing in the news release to indicate if this plan will be brought to fruition. There are, apparently, no deals currently signed, just good intentions.
Costs are being reduced, too. Pengrowth reduced its quarterly dividend to $0.01 per share for the last quarter of 2015 and then eliminated the dividend altogether to start 2016. There is no money allocated towards new drilling in 2016. Production at existing wells is reduced. Head office staff has shrunk by 26 percent. Pengrowth is bailing water. Fast.
“For an investor with a five-year horizon, oil may be a good play,” says Fraser Sutherland, Vice-President, CIBC Wood Gundy. In other words, if you can wait five years, oil price should rebound and oil production company share prices will roar back earning investors a tidy profit. Or so the theory goes.
“Based on a consensus of oil research firms, it is expected that West Texas Intermediate Crude will sell for approximately $70 a barrel in 2018,” says Sutherland. This falls between the very profitable price of $105 seen in 2014 and the devastating price of $61 seen in September 2015. It is also the number which most pundits pick as the price needed to see an efficient Canadian oil industry return to profitability.
We are left with two questions: (1) Will the $70 per barrel prediction for 2018 come true? (2) Can Pengrowth stay afloat until then?
As is often the case with global business, unforeseen circumstances – war, terrorism, revolution – can have a remarkable effect on things like the price of oil, both good and bad. Jobs, savings, and, indeed, whole provincial economies may turn on this question.
Pengrowth Energy Corporation Stock Price by DaveScharf on TradingView.com