Spyglass Resources: Revisiting The Dividend Sustainability for 2013

A lot of digital ink has been spent over here on Spyglass Resources in the past few weeks. The new entity formed through the combination of Avenex, Pace & Charger has so far failed to impress the market. Investors have been doubting SGL’s ability to meet guidance and an underwhelming Q2 simply confirmed it as the company lowered its guidance for 2013.

In my opinion, the Q2 report wasn’t great at all given the reduction in production guidance. Production exit guidance went lower from 18,000 boed to 17,000-17,500 boe/d for 2013, average production was reduced to 15,500-16,000 boe/d from 16,000 boe/d.

The market HATES it when a company fails to deliver on its promise regardless of who’s to blame. Production guidance was slashed following the cancellation of the well planned at Noel (IP 800-1,000 boed) due to low natural gas prices.  AECO would have to be in the upper half of $3 in order to go through with the drilling and it’s nowhere near it right now.

Operating expense came above $18 per boe and I it will be hard to drop below the $18 figure given average production might actually be dropping for the year.

The company is still targeting a 100% all in payout ratio BUT only after asset dispositions of $10 – $15 million. So instead of having this money paid down on debt, it’ll be used to cover for the dividend shortfall. Net debt still stood at $297 million at the end of Q2 and will most likely be around that number by the end of the year. So unless natural gas prices rise or they execute further assets dispositions, the debt to cash flow multiple will remain very high.

Let’s revisit the dividend sustainability for 2013 where the company will be paying $0.203 per share with the following scenario.

  • Average annual production of 16,000 boed (50% oil)
  • Edmonton light at $90 = realized price of $80
  • Natural Gas at $3.30/mcf AECO
  • 2013 capex of $67 million (down from $72M)

For operating costs, we’ll go with $20 per boe (Q2 actual was $18.17 + $2.20 for transportation per boe). G&A is estimated at $3.50 for the year and $3 for next year. I used $2.25 per boe for interest expense. Both the $3.50 & $2.25 figures are provided by the company the last time we spoke.

spyglass 2013 payout ratio

What do we get? An all in payout ratio estimate of 113% versus 103% the last time I ran the numbers. The reason is simple, the oil weighting is slightly lower and the operating expense per boe is a few dollars higher as transportation was not accounted for last time.

At 113%, that’s a $10 million deficit that will be plugged using the asset dispositions they announced. Always remember that these are ball park numbers, if the company averages less than 16,000 boe/d this year, the picture will be different. I still used the higher end of their guidance, not a great idea for a company with no history of delivering on its promises.

The dividend for this year seems to be safe underpinned by a strong hedge book and the proceeds from asset dispositions. But the stock price won’t be going anywhere any-time soon in my opinion. The following factors could move the stock price SGL.TO 0.305 [+0.005] significantly in the 2nd half of the year if:

  • Oil prices hold and NG price rises
  • Oil prices drop along weak NG prices
  • IP results (particularly from the Viking) come in above or below expectations
  • Further asset dispositions are executed bringing the debt to cash flow lower from ~3.6x.

Until any of the above materializes, the high yield is indicating a high level of risk. I would be more optimistic for 2014 on the basis of AECO rising closer towards $4 per mcf. The 50% of NG production is a call option on the recovery of natural gas prices and that would boost the stock nicely. If that does not happen, the lacklustre performance will be here to stay.

Finally, there’s one positive item worth highlighting, year to date drilling and completion costs are estimated to be 5 – 10% under budget. What I would like to see the most is some strong well results come September because the stock could use a lift from here!

 What do you think of SGL?







14 comments to Spyglass Resources: Revisiting The Dividend Sustainability for 2013

  • NLR2

    Any guesses for what Pinecrest Q2 will bring? I’m assuming it will be pretty grim due to the lack of activity. Hopefully they have got debt down a bit and have some concrete results from the waterfloods. I may be out to lunch but if it sells down after the results come out they may be able to surprise in the back half of the year.

    I don’t really see any reason to hold Spyglass over SGY, TOG, LEG, CPG, BNE heck even LTS. The assets don’t really do anything for me.

    • Mich

      The market seems to be pricing in a HYX scenario, ie waiting for PRY to hit the wall of no growth. I don’t know what to expect, I’m in a wait and see mode, ‘d rather put my money in other opps at this point. I’m more looking forward towards PXL’s results since WCS prices doubled from Q1…

      This is the last post on SGL for the year, I agree that there are many other better divvy payers. But there are a lot of investors out there following the story from the trio days.

      I’m surprised you included LTS in your list, I would rank it lower than SGL since SGL will gain momentum on higher NG prices. LTS however gains nothing and oil is already high. So if they can’t afford their dividend now, when will they be able to?


  • NLR

    I guess as far as LTS I just meant asset wise I find it more interesting then Spyglass. You are right that they probably should not have a dividend. Haha. Ya until PRY shows that they can grow consistently on their own cashflow not much reason for optimism. That is a good point about Palliser. When do they release? Also do you know when MQL releases?


    • Mich

      I don’t have the exact date for the Q2 releases, my guess it’s very soon prior to the end of the month for both PXL and MQL. Looking forward to results on MQL’s second dual-zone well!

  • hivoltage

    Cash netback this quarter of only ~$14/boe(w/~$3.30 AECO) and less than $11/boe YTD – that’s terrible and less than my est. of $15-16/boe . The only thing that saved them for now was the low-hanging fruit work-overs and recompletions that added around 500 boepd for the quarter . Looks like they’ll be losing some land at Noel through expiries by deferring drilling this year . IP rates on the limited drilling are NOT impressive or enough to stem inevitable decline which will come back to bite in 2014 .

    • Mich

      Pitiful netbacks HV, I agree, they need to improve it closer to $20 per boe. Their opex is on the higher end, they have a lot of work to do!

      I hope to see some IP rates come September, they will be a stock mover either up or down.

  • hivoltage

    Let’s look at the annualized decline rate from Q1/13-Q2/13 . Production dropped from 17,340 boepd(pro-forma)to 16,362 boepd , that’s a 22.6% annualized decline rate even with the better than expected workovers/recompletions . Apparently their decline rate is north of 23% NOT 20% as they say in their presentations .

    Their “estimated” July field production of 16,900 boepd includes 7 wells drilled YTD . That leaves them with around 13 more wells to drill for 2013 . Even if these wells averaged 100 boepd for the rest of the year(doubtful) that would only contribute ~1300 boepd of new production to stem declines of around 3700 boepd .

    Let’s do a cashflow analysis . If they average 16,000 boepd and get ~$13/boe netbacks then that’s only around $37 million in cashflow to cover dividend + capex of ~$62 million for the rest of the year . It just doesn’t add up , much like all their forecast and promises .

    Finally their pitiful $10-15 million asset sale in Q3/13 won’t put a dent in their HUGE Q2/13 annualized debt/cashflow of 3.6x.

    • Mich

      HV, your numbers are close to mine, my cash netback is around $14 resulting in $10M+ loss for the year. The asset sales is what it saved them this year but it’s a shame since the money should have paid down debt rather than cover the shortfall!

      • Tweetie

        Many reports of Spyglass insiders buying on 14-08:
        Shaikh, Mazhar H. (Mike) 185,600
        Buchanan, Thomas William 150,000
        O’Byrne, Daniel James 75.000
        Walker, Mark Nicholas 50.000
        Smith, Jeffrey T. 10.000

        • Mich

          Tweetie, this is actually very positive, insiders need to put their money where their mouth is! If they truly believe in their company, they have to step up and show it.

  • Ray

    heh, the very next day SGL is up +11%. Have faith, brother. I’m down -41% on this one :(

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