January 12th, 2012 
Category: 
NAL Energy NAE.TO 6.53 [0.00] slashed its dividend by 29% reducing it from an annual $0.84 to $0.60 per share and went into production maintenance mode by reducing its capex to $200M for 2012. Not surprisingly, NAL executed the scenario that I discussed back in December when I demonstrated the unsustainability of their dividend. The 2012 production guidance of 28,500 boe/d essentially turns NAL into an income play with no growth as their $200M capex program will simply maintain their current production and bump their oil weighting by a meagre 3% to finally balance liquids and dry gas on a 50/50 basis despite earmarking 85% of their capex to oil weighted drills. I believe the stock will most likely underperform in 2012 based on running 2 set of scenarios which indicate the company is not in its best shape. Let’s review some numbers together.
First, do not be fooled by the 35% payout ratio announced by the company, this is the basic payout ratio and what you need to look at is the sustainability ratio which takes into account the $200M in expenditures. The problem with NAL’s production is that at current natural gas prices 50% of production is almost useless while the other 50% in liquids has to do the heavy lifting by providing CF for paying distributions and funding developments. With gas prices averaging $2.70/mcf YTD, I can’t imagine NAL is enjoying healthy profit margins. Add our mild weather on top of it and there’s no hope gas will ever see an average of $3.00/mcf this year if our winter ends up with a thud.
Let’s take the lower range of their guidance with 28,500 boepd in average daily production and the announced capital expenditures program for 2012 of $200M (figure I used last time as well). Using the following strip pricing for 2012 let’s compare the results:
|
NAL Strip Pricing |
BTI Strip Pricing |
| · Canadian Par $95.00/bbl
· Liquids at $65/bbl · Natural Gas at $3.50/mcf
|
· Canadian Par $90.00/bbl
· Liquids at $65/bbl · Natural Gas at $3.00/mcf
|
I think NAL should have used a lower price on NG given the unlikeness of a recovery in the short term. With only 10-15% of its volumes hedged, I’d be happy if the company averages $3/mcf in 2012 if sub $3 gas prices persist throughout the year. Strong oil prices might balance things out as they are currently above $100 but we all know how quickly the price of oil can shift and in my opinion they should have budgeted for lower oil prices like $85 or $90 per barrel. I am assuming that the hedges will smooth the volatility and settle prices around $90 /bbl (67% of 2012 volumes are hedged). Chances are oil prices might end up higher in 2012 but I want to be somewhat conservative with my numbers.
Based on NAL’s scenario, the sustainability ratio comes out around 104% which is acceptable but not optimal as 2012 is loaded with many unknown variables. Of course, taking DRIP proceeds into account slightly improves the ratio but it is not a magical solution. Using my numbers, the sustainability ratio shoots up to around 110% which is as bad as in both scenarios the company will be paying more than they will be bringing in.
Both scenarios will result in a 0 growth company with rising debt (don’t forget adding $80M in debentures on top of the LOC) unless they dispose of some non-core assets. I believe this should be the next step by the company in order to increase their margin of manoeuver financially. The cut is definitely a step in the right direction but the balance sheet is delicate at this stage which makes me believe NAL’s stock will underperform its peers in 2012 as the market pays for growth and not for a combination of tread milling and rising debt.
What’s your opinion on NAL Energy?
Good write-up Mich, I’ll be watchng NAL.
Thanks Doug, I’ll be following the company as well!
[...] The Index questionned whether NAL Energy will underperform in [...]
Eric McNuttal (sp?) from Sprott is a great forecaster… he indicated we’d see natural gas prices go down in 2011 and 2012 when they were at $4+. Shale gas plays have simply flooded the marketplace and the uses are somewhat limited, although they could be expanded.
Eric Nuttal is a great guy but like all forecasters he will never be 100% right. WFE at $20 anyone?
Good analysis, Mich.
The price of nat gas may be going down, but there’s a whole lot of infrastructure going up. I had a conversation on this yesterday with some colleagues. Lots of little gas plants and gas compression packages going up, each with some process equipment that our company makes. The challenge is to get down and dirty and cheap, because it’s a bloody competitive environment and everything is done on a shoestring budget.
Spot on 101, there are sectors/industries who are benefiting from these low NG prices. No hope for NG until export terminals become operational.
Mitch, do you think NAL will be able to sustain it’s 5 cent dividend? I ask this because the current 8.2% yield looks very attractive.
Bayou, I think NAL will be able to sustain its dividend since it has solid hedges for67% of its oil production. However, I believe that given 2012 might see some turbulence just like 2011, NAL’s stock might be hit hard and it would be the perfect time to pick it up.
[...] Mich presents NAL Energy to Underperform in 2012? posted at Beating The Index, saying, "I believe the stock will underperform in 2012 based on running 2 set of scenarios which indicate the company is not in its best shape." [...]
[...] The Index : NAL Energy to Underperform in 2012? – I believe the stock will underperform in 2012 based on running 2 set of scenarios which [...]
[...] presents NAL Energy to Underperform in 2012? posted at Beating The Index. I believe the stock will underperform in 2012 based on running 2 [...]
[...] presents NAL Energy to Underperform in 2012? posted at Beating The [...]
[...] at Beating the Index seems awfully confident in her ability to forecast, and is convinced that 2012 will be dismal for [...]
[...] during Beating a Index seems extremely assured in her ability to forecast, and is assured that 2012 will be gloomy for a [...]
[...] closing of the deal. I analyzed NAL back in January where I explained why the company was going to underperform in 2012, besides a miracle in natural gas prices there was no way the share price was going to recover this [...]