Longview Oil Corp: Dividend Sustainability Analysis

Longview Oil (TSX-LNV) emerged on April 14, 2011 following the acquisition of almost all of the oil-weighted assets of Advantage Oil & Gas (TSX-AAV). The company has a low risk oil weighted portfolio in 3 core areas: West Central Alberta (60% Liquids), SE Saskatchewan (light oil) and Lloydminster (Heavy Oil). LNV’s business plan is based on a dividend growth model paying an annual distribution of $0.60 per share and 5 – 8% growth in production. While the company is targeting a 100% total payout ratio for capital expenditures + distributions, the dividend might have to be cut if the company intends to hit its sustainability ratio.

Last month Longview announced a $27 million reduction to its 2012 capital expenditure program bringing it down to $46 million down from $73M. Production guidance was reduced to 6,400 boepd (77% liquids) for annual average production and the exit rate, down from ~6,800 boepd. The company was simply reacting to lower oil prices and widening differentials. However, even with the cut, the total payout ratio is still above 100%.

While the stock price for Longview LNV.TO 6.90 [+0.06] has suffered like its peers, it currently sits below the Q3-2011 low. The market punished the company for reducing its spending (even if it was the right thing to do) and is signalling the dividend is still not sustainable. Let’s take a closer look at Longview’s numbers.

2012 scenario + price deck:

  • Average production: 6,400 boepd (77% liquids)
  • Edmonton Par oil price: $80 CAD
  • AECO Natural gas: $2.10 /mcf

The realized price for oil is in line with company guidance which assumes  $85-$90 WTI depending on differentials with Edmonton Par. Furthermore, our oil price is supported by hedges of 2,000 bopd in a $90 – $97 range which cover 45% of it’s oil production. It’s certainly not conservative given how quickly we saw the price of oil tumble a few weeks ago but realistic for 2012. The realized price of natural gas is insignificant in the overall picture as the bulk of cash flow is generated by liquids; YTD AECO has averaged $2.05 /mcf. Using  2012′s production guidance, the company needs to realize an average of $90 CAD per barrel in order to achieve a total payout ratio < 100%. In this environment, it’s always better to take the safer approach of using lower oil prices in predictions.

The total payout ratio comes out to ~117% meaning the company for 2012 is adding more than $10M to its debt. Even though total debt will end up about $105M drawn on a credit line of $200M, funding the dividend by borrowing money usually doesn’t last long. Longview would have to cut its dividend by 40% in order to run sustainable operations. Using a $0.36 annual distribution per share, the total payout ratio settles slightly below 100% as long as oil prices average around $80 CAD per barrel.

Since this is a new entity with little production history, the growth portion would have to wait for a few quarters. Having assembled an 89% oil weighted inventory of 244 net locations, growing production should not be a problem at all for LNV if we ignore Q2-12 figures due to spring breakup and third part facility outages impacting production levels. The company can easily repeat 2012’s capex program year after year for more than 10 years. The only variable that requires improvement here is really the dividend sustainability ratio.

Longview enjoys a large undeveloped land position in SE Saskatchewan (116 net sections) with multizone potential including Bakken and Midale light oil. Not to forget 123 net sections at Sunset prospective for Duvernay Shale in the oil generating window. LNV investors get the exploration upside as a bonus at this price which currently trades at a significant discount to NAV estimated at $15.12 per share by the company.

Longview Duvernay Land

Duvernay Exploration Upside for Free!

The one obvious risk to Longview resides in its exposure to the price of oil. Furthermore, I believe that maintaining its dividend through incremental debt is what’s currently undermining the stock even if the company can afford to do it this year and the next. If WTI oil holds around $90 and Canadian oil differentials remain subdued, there’s a good chance the debt that will be used to fund the dividend is cut in half. But with a net debt to cash flow ratio exceeding 1.7x for 2012 based on $80 CAD oil in an uncertain economic environment, I think it’s prudent to reduce the dividend in order to preserve balance sheet integrity and the loyalty of income investors. The dividend may be safe for the remainder of 2012, but I think there’s a chance a reduction is in the cards for 2013.

What do you think of Longview Energy?

15 comments to Longview Oil Corp: Dividend Sustainability Analysis

  • Paul

    Doesn’t AAV still own about half the shares? If they get into trouble and sell them all at once…

    What is rather annoying to me is that LNV was promoted as one of the safer oil investments and with an accordingly lower dividend. But it looks to be just as risky as the rest of the oil patch.

    • Mich

      Indeed Paul, 45% of the shares are still owned by AAV. But the scenario of dumping all the shares in one shot is a long shot in my opinion.

      The problem with many of the dividend paying oil and gas companies is that they assumed $100 oil was here to stay. No one took a conservative approach accounting for differentials + volatility in prices especially in this environment.

      It looks like the stock got hammered today, I guess the market agrees with my assessment…

  • john

    all management should be held accountable if they base their business model on $100 oil and $3+ nat.gas I mean, if you look at the charts for the previous 5 years, oil has only spent above $100 for a relatively short time period.

    anyway, the parent company selling longview doesn’t help matters either. I wonder if they have explored the option of shopping longview around. I know with Petrobank selling Petrobakken shares, you could make the argument that the parent company was hurting its own cause by continually selling the shares of petrobakken into the market depressing the stock and lowering the shareprice they were able to get for their pbn shares. I cant believe there was not a more efficient way for petrobank to monetize part of its petrobakken assets other than continually selling 100,000 pbn shares every day into the market until the number of shares they were allowed to sell (I think it was 6 million) was reached. The funny thing is, is that because petrobank is enrolled in petrobakken’s DRIP plan, they are almost receiving the same number of new pbn shares as they are selling. Its like a continual, never ending supply of pbn shares petrobakken can share into the market. I think petrobank has the option to renew their NCIB program, which could include selling their pbn shares to fund the acquisition of their own shares, in october.

    Anyway, sorry for the long-winded comment, its just that aav selling lnv reminded me of pbg selling pbn.

    Keep up the interesting articles.

    • Mich

      John, good point regarding oil prices. Let’s add that natural gas prices have not helped either in the case of other companies.

      As for PBG/PBN, maybe it makes more sense to switch from PBN to PBG? There’s a regular reader here who did just that. True you lose the dividend but in terms of value you gain the difference, on paper at least until the inevitable spinoff of PBN shares back to shareholders.

      Always appreciate your feedback,

      Cheers,

      • That reader was me. I swapped out a fair number of shares of PBN for an equal number of PBG a few weeks ago at an average differential of $1.20-pocketing the change as it is more than one year’s dividend up front. Then I expect by the end of 2013, that PBG will spin off its PBN shares, and I will receive 1 PBG share + 1.08 PBN share, even if PBG is only worth the cash on hand, it alone is worth a minimum of $1.00 per share.

        By selling its PBN and buying its own shares, PBG is just taking advantage of market inefficiency; so they can hardly be blamed. Meanwhile, I was under the impression that PBN was also buying a large number of shares for cancellation, so the effect PBG sale of PBN is minimal in terms of dilution. If you have a long term investment horizen, I don’t think you can go wrong with either PBG or PBN (+dividend). It’s like owning CPG at a steep discount in my view. I am a happy investor in CPG but a couple of years ago I decided I’d rather pay a discount for PBN than a premium for CPG.

  • Lee Roth

    LNV.TO is not cheap at all with 75% oil and liquids.

    LNV.TO trade at 65,000 $/boepd currently at 6,70$ !

    I prefer TOL.V (TriOil) with 80% oil and liquids trade at 33,000 $/boepd. This is bargain for me.

  • Lee Roth

    AAV.TO is not cheap either. Actually the entire group (AAV.TO, LNV.TO) is overvalued.

    AAV.TO is nat gas weighted with 95% nat gas. Despite this AAV.TO trade at 35,000 $/boepd !

    Among the nat gas weighted stocks, I prefer Waldron Energy (WDN.TO) with 28% oil that will exceed 30% oil by Q3 as they hit a very oily pool recently with wells of 700 boepd !

    This is why the insiders of WDN.TO just put 1 million $ from their own money in the recent placement at 0,57 $ and the placement was increased by 50% to cover the demand.

    WDN.TO trade as low as 16,000 $/boepd currently !

    The canadian billionaire Ned Goodman owns 15% of WDN.TO at an average 1 $ which is another sign of confidence imho.

    cheers !

    • Mich

      WDN’s next catalyst lies in the result of the 1st Duvernay oil well in the East Shale Basin. Besides that, I’ll take TOL over WDN anytime….

  • Lee Roth

    Mich you say that “dividend payers usually enjoy higher metrics…look at TBE vs PXL & RE for an example.”

    I think this is not the main reason for this valuations gap.
    The main reason is the low awareness of TOL.V and WDN.TO among investors.

    The difference in the valuations of LNV.TO/TOL.V is huge !! For what ?? For a 9% dividend of LNV.TO ?? This is stupid !! The investors who buy LNV.TO must be real stupid and close-minded as the potential capital losses due to the overvaluation of LNV.TO can be much bigger than the dividend offset.

    and AAV.TO does not pay any dividend and has only 5% oil…. However it trade at 35,000 $/boepd !

    • Mich

      Lee a dividend might be stupid to you but it’s not for income investors who would have otherwise not bought into the security in the first place.

    • I have to think that both Lee and Mich are right on this one. You usually have to pay a premium for a dividend stock because income investors buy them. And little notice juniors are often at a discount.

      I once read that stocks that have no analyst covering, or at most only one or two, outperform the market. This means little stocks off the radar have a good chance of outperforming.

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  • Brad

    This is falling too far, too fast not to have something baked in. Either the cut is on its way, or someone’s accumulating based on a potential sale. Either way, it sucks to be on the outside looking in.

  • Mich

    The volume is 2-3x the daily avg, I did not expect it to fall this fast since they’re not in a bad shape financially speaking. I guess the market just realized it was not “punished” enough to account for the dividend cut?

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