Pengrowth Dividend Cut Seen as Energy Declines: Corporate Canada

Pengrowth Energy Corp. (PGF) and Penn West Petroleum Ltd. are under pressure to follow Enerplus Corp. (ERF) with dividend cuts as high-yielding Canadian oil and gas producers preserve cash in response to falling energy prices.

Enerplus reduced its dividend by 50 percent to 9 Canadian cents a share, the first cut to its payout in more than three years. The move announced on June 12 dropped the Calgary-based producer’s dividend yield to 8.3 percent.

Pengrowth, Penn West, Peyto Exploration & Development Corp. (PEY) and Bonavista Energy Corp. (BNP) may all follow suit with reduced payouts as oil trades near an eight-month low, said Kyle Preston, a Calgary-based analyst at National Bank of Canada.

“Once one company cuts, it opens the door for others to proceed,” Preston said in an interview. “These companies are looking at the broader global market and the uncertainty and taking steps to protect their balance sheets.”

Enerplus, valued at about C$2.6 billion ($2.5 billion), has seen its shares lose half their value this year. The stock fell 3.7 percent on June 13 after the dividend cut was announced.

Pengrowth fell 35 percent this year through yesterday in Toronto, which compares with declines of 30 percent for Penn West (PWT) and 46 percent for Bonavista.

Smaller Canadian oil producers are reassessing their financing plans as energy prices slip. Crude futures in New York fell to $81.07 a barrel on June 12, the lowest intraday price since Oct. 6. Oil declined 43 percent from a record in 2008 of $147.27, and was down 15 percent this year.

Yield, Growth

“This reduction will strike a better balance between yield and growth, allowing continued investment into our asset base in a more sustainable manner,” Enerplus said in its statement on June 12.

Producers with the highest payouts are most likely to follow Enerplus, Preston said.

Enerplus and Penn West are former income trusts, companies that distributed most of their income to shareholders in monthly payouts. The Canadian government shut down the structure in 2006, forcing these companies to convert to dividend-paying corporations.

For every C$100 Enerplus had in cash flow from operations in the first quarter, it paid shareholders C$154 in dividends, the highest dividend-cash flow ratio among 45 Calgary-based oil and gas-related companies with market capitalization of more than C$1 billion, according to data compiled by Bloomberg. Pengrowth paid out C$60 in dividends from cash flow, compared with C$43 at Penn West and C$42 at Peyto.

Weak Prices

Pengrowth has no plans to cut its dividend, Chris Webster, the company’s chief financial officer, said by telephone.

“While commodity prices are weak, we feel there is no reason to examine the dividend right now,” Jason Fleury, a Penn West spokesman, said in a telephone interview.

Jim Grant, a Peyto spokesman, said by phone the company has no plans to cut its dividend. Cameron Deller, a Bonavista spokesman, declined to comment when contacted by phone.

Retail sales in the U.S., the world’s largest consumer of oil, fell in May for a second month, prompting economists to cut forecasts for economic growth. Slower growth reduces demand for oil, which is used to make gasoline, diesel and jet fuel.

In Europe, gross domestic product in the countries that share the euro may contract 0.4 percent this year before expanding 0.9 percent in 2013, according to a survey of economists by Bloomberg. Canada, the world’s 10th-largest economy, may grow 2.2 percent this year.

10-Year Low

Natural-gas futures in New York touched a 10-year low of $1.902 per million British thermal units in April and averaged $2.50 in the first quarter. The fuel surged to $2.495 per million Btu yesterday after a government report showed a smaller-than-estimated gain in U.S. supplies last week.

Limiting dividend spending allows companies to continue investing in operations and avoid selling assets, said Gordon Currie, a Calgary-based analyst at Salman Partners. Zargon Oil & Gas Ltd. (ZAR) is also among firms that may reduce dividend payouts, he said.

“Reducing capital expenditures may limit future growth,” Currie said in a note to investors.

Jason Dranchuk, Zargon’s chief financial officer, declined to comment on its plans, saying that dividend policy is the responsibility of the company’s board of directors.

Bakken, Marcellus

Enerplus produced an average of 79,190 barrels of oil equivalent per day in the first quarter. The company pumps oil from its leases in regions including the Bakken in North Dakota and the Marcellus in the U.S. northeast, according to the company’s website. Enerplus controls reserves equivalent to 322 million barrels of oil.

The 12-month dividend yield at Enerplus, the dividend per share as a percentage of the share price, was 16.4 percent before the cut, more than five times greater than the 3.1 percent dividend yield of the S&P/TSX Composite Index. (SPTSX) The dividend yield is now 13.4 percent for Zargon, 12 percent for Pengrowth, 10.3 percent for Bonavista, 7.7 percent for Penn West, and 4.1 percent for Peyto.

With a lower dividend, Enerplus can now focus on expanding its business, said Grant Hofer, an analyst at Barclay’s Capital in Calgary.

“This cut was long overdue and should be a positive from a funding perspective, as well as supporting growth into next year,” Hofer said in a June 13 note to investors.

To contact the reporters on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Christopher Donville in Vancouver at cjdonville@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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