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.
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 2.04 [0.00] 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?