In case you haven’t noticed, NAL Energy NAE.TO 0.00 [N/A] is on a 2 for 1 sale right now after falling from a high of $14 earlier this year down to the current $7 level. It seems investors are aggressively betting on a dividend cut and the trading pattern kind of reminds you of Daylight Energy’s last days. However, before you get all excited about a happy ending “a la Daylight” and enter bids on the open market, you might want to keep reading as I believe a dividend cut could be announced in Mid-January when the 2012 capital expenditures program is released.
2011 has been disastrous for NAL and I am not talking in terms of share price performance in this market but in terms of getting operationally hit where it hurts the most: Saskatchewan where around 25% of its total production, 93% oil weighted, is based. The extended breakup devastated its development program and the company was still recovering from it during Q3. Of course this is not counting the unplanned plant outages and infrastructure constraints which impacted a total of 1,000 boepd at one point combined.
NAL’s Core Assets – company presentation
The end result is an ugly sustainability ratio north of %140 excluding DRIP based on an average production of 28,500 boepd this year. Remember, the sustainability ratio represents the ability of the company to pay dividends and fund their capital expenditures from cash flow. How much should the company cut in order to hit that ratio? Let’s build a scenario for 2012 with the following assumptions:
29,000 boepd in average daily production in 2012 based on NAL’s exit rate guidance for 2011. Liquids production increases to 14,000 boepd accounting for 48% of volumes, up from 46% as of Q3. No acquisitions or dispositions with a 2012 capital expenditures program of $200M which is lower than 2011’s program. Using the following strip pricing for 2012:
· Canadian Par $90.00/bbl
· Liquids at $65/bbl
· Natural Gas at $3.50/bbl
I am inclined to put a lower price on NG given there’s no hope in the short term for a durable recovery but I guess $3.50 will do as it is lower than what most analysts are using. Even though I would have preferred a lower price for oil, I am assuming that the hedges will smooth the volatility and settle prices around $90 /bbl. Chances are oil prices might end up higher in 2012 but I want to be somewhat conservative with my numbers.
The current scenario results in a cash flow netback of around $25-$26/boe and most importantly it results in a sustainability ratio around %120 which is lower than 2011 but still not to my liking. The company has $80M debentures maturing in August of 2012 which will have to be paid from their bank line. Their line of credit offers $550M with $302M in use at Q3’s end and at least $80M to be added in 2012 without counting any amount that will be used to fund future expenditures.
With a Debt to CF ratio above 2, the company should avoid making debt the big elephant in the room. If management is truly conservative, they will cut the dividend preferably to a point where the sustainability ratio closes in on %100. If they cut their dividend to $0.05/share they will get their ratio down to ~105% but cutting the dividend to $0.04/share will be perfect as they do not have to use any debt in 2012. The problem is $200M in capex might just be enough to maintain production or grow it slightly from their exit rate.
|
Annual Dividend |
Dividend Cut |
Yield at $7.00 |
|
$0.60 |
-29% |
8.5% |
|
$0.48 |
-43% |
6.9% |
As you can see, it looks like the market is pricing in a cut, the question is how much will the cut be? And is the cut totally priced in or is tax loss selling blurring the picture? If NAL slashes their dividend down to $0.04 will the stock temporarily tumble?
I personally like NAL Energy, as they have a geographically diversified asset base with nice oil prospects in Saskatchewan and Alberta. The stock is currently undervalued in my opinion but I will be waiting for the 2012 guidance before I take my decision to increase my position in this company or not. I think cutting the dividend makes sense as natural gas prices will continue to languish in the near future so why not focus its debt+cash-flow into aggressively increasing its oil weighting?
Do you think the dividend will be cut? or do you think this is just manipulation and tax loss selling?
