Renegade Petroleum?s stock price got hit hard last Friday losing 12% during the day. The drop came after it released its year end results a day earlier. Investors were not happy to see its debt standing at ~$291M vs ~$247M on higher spending and higher closing adjustments for its Queensdale asset acquisition. On top of the debt, above normal flooding risks in southern Saskatchewan has also undermined the share price.
Recall Renegade Petroleum RPL.V 2.00 [+0.06] converted to a dividend paying model by purchasing 3,600 boe/d of production 94% weighted to light oil. While there?s no change in 2013 guidance of 8,000 boe/d, the debt to cash flow shot up from 1.9x to 2.3x. This market hates debt, especially for a dividend paying corp. The debt is still manageable as the company?s sustainability ratio is currently estimated at 98% in 2013. However, the main point that stands out is that with ?higher leverage
- it will take the company longer to bring down the debt to acceptable levels.
Of course, the latest warning by the Water Security Agency in Saskatchewan does not help. This winter saw snow fall at the high end of the historical range so risks of flooding are above normal.
Everyone in Saskatchewan should be concerned. We should look back at what happened in 2011 and we should learn from those lessons,??said?Cheveldayoff, Minister responsible for the?Water Security Agency.
Renegade?s areas of operations lies within areas highlighted with above normal flooding risks. The impact could force producers to shut-in production or delay operations substantially which could impact corporate guidance negatively.
Is this guaranteed to happen? No, of course not but I believe it is a risk the market is accounting for right now. That?s because if it did happen, Renegade would see its debt to CF rise even higher prompting more investors to exit the stock due to the increase in leverage. The fact that the company is ~80% drawn on its bank lines ($255M post asset sale closing) does not help.
Spring breakup is now in effect in some areas, so we will soon know if a repeat of 2011?s flooding is in the cards or not. Dividend paying companies with substantial Bakken production could also be impacted. PetroBakken is a potential victim here given its shaky balance sheet and a substantial amount of production coming from Saskatchewans Bakken play.
Now that we got the major risks out of the way, things are operationally on track.
The 30-day IP rates in the Viking for the first quarter have increased by more than 22% from 2012 to an average IP rate of approximately 60 bbl/d on the first 12 gross (12.0 net) wells. Their?Souris Valley play continues to outperform with ?average IP90 rates of 240 bbl/d.
Renegade entered into an agreement to sell $13M in non-core assets. It has also managed to hedge 71% of its production at WTI ~C$94. Commodity price risks has been largely mitigated even into 2014 as RPL hedged 59% of its oil production so far at WTI C~$92.50 per barrel.
With an all in payout ratio of 98%, this is one of a few companies that does not overspend cashflow!
Upon closing their non-core asset sale of $13M their debt would drop to ~$278M and a further ~$3M if the program is executed without any hiccups for the remainder of the year. This would leave the company at 2.1x DCF ratio based on a realized oil price $85 per barrel CAD. Unfortunately, this leverage will keep some investors on the sideline until we get through Spring breakup.
Is the selling overdone? I think so, but you cant reason with a market that hates debt. I believe the share price will start recovering once we are past spring breakup. The share price recovery will be underpinned by a successful?execution of its program over the coming quarters. If youre a shareholder in RPL, you will have to be patient
What do you think of RPL?