Last week, Parallel Energy Trust announced the acquisition of the remaining 41% interest in the West Panhandle Field increasing the monthly dividend from $0.075 to $0.08 per share. However, before you get carried away with the extra money you will be pocketing every month, let’s take a quick look at the sustainability of this distribution.
The acquisition is accretive on all metrics related to reserves, production, cash flow and payout ratio just like the company announced. It is a great move on the part of Parallel because the company is now the sole owner and operator. It will be retaining the same team that is currently in place. With a current yield of about ~13% what’s not to like about PLT.UN? Let’s look beyond the 13% starting with the operational hiccups that have been plaguing this company since it started trading:
Production has continued to be impacted by plant outages and other operational issues and is running approximately 5% below the productive capacity of the field’
The company needs to clean up its act when it comes to these operational issues as they are costly. Their Southern field currently has access to 1 natural gas processing plant. This means that for every day of downtime the company loses 2 days of production since it takes half a day to stop production before the downtime and half a day to resume full production.?? The company is currently in discussions with a third party for adding a second plant which would solve downtime issues as production can be shifted between the 2.?? Now that the company is in charge for the entire field, procedures are being changed in order to avoid these hiccups. ??According to the news release, the operational issues are being addressed by the company:
Operationally, changes to field staff were made in the first quarter to reduce the operational down time in day to day operations. Production optimization opportunities have been identified which will include changes and upgrades to several compressors, which are expected to improve daily production rates and maintain consistent daily production levels We continue to evaluate alternative processing facilities for production in the Carson area to provide an alternative source of processing during downtime currently experienced with the existing processing plant.
Next, let’s take a look at the sustainability of this generous distribution using a conservative price deck. For some reason several analysts/companies still use imaginary prices for natural gas in their calculations. In our case even if 85% of the cash flow is WTI related, I will use a more realistic price for the natural gas component. Parallel Energy is guiding for average annual production of 7,100 to 7,500 boe/d with a 67% liquids weighting.?? Let’s go with the low end of this forecast at 7,200 boe/ in a scenario where the company is targeting replacing 10% in production declines and adding +5% in production growth. This is basically maintenance capex with very low growth which results in a capital budget of $15M for drilling 27 wells. Add $1M in facilities infrastructure and miscellaneous expenses and our total capex is $16M. Using the following price deck:
BTI Price Deck
- Oil at $100/bbl WTI
- Condensate at 80% of WTI
- Natural Gas Liquids at 55% of WTI
- Natural Gas at $2.50/mcf
In our hypothetical scenario, the total payout ratio comes out to ~104% and falls below 60% if we factor in the DRIP. But remember, this is a hypothetical scenario that the company might pursue starting next year. The total payout for this year reaches 120% for a capex of $26M and falls below 75% if DRIP is factored in. In that regard, the distribution hike does not make a lot of sense especially when the debt to cash flow comes out to ~2.1 excluding the debentures.
A drop in WTI prices will be deadly for PLT.UN
The sustainability ratio numbers only work when DRIP proceeds are factored in. In my opinion, this is not a blind buy and hold. The biggest risk to the stock is the price of WTI oil which could easily slip below the $100 mark in the near future. If WTI prices average $95, the total payout ratio shoots up 10%; obviously the stock will reflect a falling WTI oil price. Henry Hub spot Natural gas prices closed at$2.03/mcf yesterday and in my opinion will average below $2.50/mcf for the year. Even though liquids contribute to 85% of cash flow, NGLs might drop from 55% to 50% of WTI prices as Butane and Propane prices vary depending on demand. Keep a close eye on Parallel Energy Trust if you hold it because it comes with a high commodity price risk to the downside which will keep a lid on the share price at least for 2012.
What do you think about PLT.UN?
