Avenex Energy: 2012 Dividend Safe Despite an Ugly Q2

Avenex Energy reported Q2 2012 production averaged 3,834 boepd, a far cry from last year’s corresponding quarter when it averaged more than 5,000 boepd. But despite having gone through a very tough quarter, no further cuts have been announced to the dividend. In my opinion, the dividend is safe for the remainder of the year and going into 2013 for a number of reasons that I will highlight below.

Not surprisingly, what really killed AVF’s cash flow (triggering a dividend cut) is the drop in Natural gas prices which fell 50% compared to the corresponding quarter last year. Add to that the declines and shut-ins in production volumes and the company will be averaging somewhere around 3,800 boepd for the remainder of the year including 2,000 barrels of oil.

But the cause for AVF’s downfall this year is potentially what will protect the dividend going into 2013; forward natural gas prices are in the $3/mf range for next year and a significant percentage of the company’s NG production is hedged around that price for 2013. A normal winter means the company could average a higher price for its gas sales next year.

Let’s not kid ourselves here, $3 AECO gas is nothing to take home but the further out you look, the higher realized natural gas prices will be as we close in on export facilities bar abnormally warm winters and mild summers.

But if the price of natural gas confirms the dividend for next year, what about the price of oil ? It is another risk factor to the dividend, but a limited one mind you due to hedges and because the oil and gas division simply funds 1/3 of AVF’s dividend.

avenex energy 2012 cash flow

Elbow River’s performance will be crucial in 2012 and 2013.

Because a portion of AVF’s oil production is of a heavier grade, they are at the mercy of price differentials as some of it is sold at Western Canadian Select prices. On the other hand, here’s where Elbow River comes in. For AVF’s marketing division which funds about 70% of the dividend, price differentials are simply profit opportunities.

Elbow River is looking to cash flow at least a similar amount to 2011, $16.3 million.  My guess is they will generate more and that’s because of strong demand to ship crude by rail.

These guys are experts in railcar logistics and have expanded by entering into physical ownership of a rail handling facility in North West Alberta in Q3. The investment requires very little capex and pays back in 6 months. Avenex’s new handling facilities will be able to ship 2,000 bopd of heavy crude with the ability to handle up to 10,000 bopd.

Infrastructure constraints have triggered a lot of volatility in the price of oil, particularly the heavy grade which resulted in increased demand to ship crude by rail in order to bypass trapped production and avoid lofty discounts. Looking into 2013, demand for shipping crude by rail is expected to remain strong which will most likely translate into another year of strong cash flow for Elbow River.

Thus, the risk to the dividend is limited in 2013 thanks to Elbow River and an improved outlook for natural gas prices. For 2012, selling Enervest Income Fund units and their last 2 real estate properties will plug the budget hole this year so another cut should not be necessary.

Finally, in the near future I see limited downside with odds favoring a stable dividend which comes out to >14% at AVF’s current share price AVF.TO 2.59 [+0.30]. But with no visible growth to speak of, I don’t expect the stock to trade anywhere near its peers. For those who have the patience to hold through the next 2 years, I believe your patience will payoff since it is only a matter of time before higher natural gas prices thanks to Kitimat et al translate into a higher distribution as the company’s asset base in NE BC supports a substantial increase in NG production.

What do you think of AVF?