Perpetual Energy Inc. is an independent energy company producing primarily natural gas with growing volumes of oil and liquids from properties in Alberta, Canada. Perpetual Energy launched on July 1, 2010 through the corporate conversion of Paramount Energy Trust, a royalty trust with a seven-year history as a premium-yielding investment in the royalty trust sector.
Quick Facts (Q3 2010):
Average Production: 25,165 boe/d, 96% Gas
O/S: 147.5 million
Net Bank Debt: $225 million
Distribution: $0.03/month * cut from 0.05
Land: 2.046 million net acres undeveloped
Q3 Operating costs down 11% Y-Y
Q3 Payout ratio: 47%, YTD 37%
Q3 realized natural gas price $6.18/Mcfe vs. $3.72/Mcf for AECO monthly average.
Outlook (updated November 10, 2010)
It seems that following Eric Nuttal’s appearance on BNN, a lot of investors discovered that PMT is heavily weighted to NG which resulted in the collapse of the share price (sarcasm anyone?). In case you didn’t know, now it should be clear to all.
First, hats off to PMT’s gas marketing group who was able to crystallize $154 million in hedging gains for 2010. The current mark-to-market value of Perpetual’s hedge book is approximately $6.2 million. This means there’s almost no more hedging as a way out of weak natural gas prices.
Obviously, the writing was on the wall for the dividend, if you were surprised with the dividend cut, you deserve to get slapped. I mentioned this previously in this section. Following the collapse of ng prices, the company did the sensible thing and cut the dividend by 40% to $0.03/mo. At current prices this would result in a lower payout ratio (<30% for Q4) with ~8% for yield.
Here’s what I said about the dividend before updating this page:
The dividend yield that stands at around 12% also should not be the reason to invest in PMT since it is expected to be cut following an extended period of low gas prices. The hedges can go so far to protect cash flow and sooner or later if the price of natural gas does not recover to at least $5/mcf, the company will have to cut its dividend. You need to keep this risk in mind, it will not be for tomorrow but it could happen anytime during 2011.
Well it’s a good thing the dividend cut happened earlier. PMT’s spending will be directed heavily towards its high impact resource plays while growing their new natural gas storage business, Q1 2011 capex stands at $48 million:
Edson area,Wilrich formation (Deep Basin Liquid Rich Tight Gas – 30.5 net locations)
- 1 HZ well (1.0 net) drilled; average production rate of 4.25 MMcf/d and 40 bbls/MMcf of NGL’s and condensate
- Three horizontal wells (3.0 net) are expected to be drilled and completed prior to year end.
- An expansion of the compression and gathering system from 10 MMcf/d to 30 MMcf/d has been initiated to accommodate the anticipated production growth.
Q1/2011: 3 HZ wells (3.0 net) wells targeting the liquids-rich Wilrich sand in the Edson area of west central Alberta;
Carrot Creek /Edson areas, Cardium formation (Tight oil – 67 net sections)
- Participated in 5 (3.2 net) wells targeting Cardium tight oil
o First 4 wells averaged ~175 BOE/d per well for first 30 days
o Fifth well to commence production in early November
Q1/2011: The drilling of three gross (1.8 net) horizontal wells targeting oil in the Cardium formation in the greater Pembina area.
Elmworth, Montney (Liquid rich gas – 78 net sections)
- Joint Venture with Tourmaline Oil to evaluate the lands
- Tourmaline to drill 3 wells (1.5 net) in order to earn 50% Working Interest by March 2011. No cost to Perpetual Energy.
- First well drilled in Q3; Second well currently drilling as of November 5, 2010
o Recent completion testing 7.5 MMcf/d with associated liquids on clean up, further testing required.
Q1/2011: Tie-in operations for the Elmworth Montney play to establish production from the three Montney evaluation wells.
Warwick Gas Storage
- Fully Operational, First injection commenced on May 2010/First withdrawal to commence in Q4.
o Reservoir performance evaluation from first commercial cycle – April 2011
o The Corporation expects that cash flow from WGSI will approximate $8.5 million for 2010 and forecasts $12+ million for its first full year of operations in 2011.
Q1/2011: The drilling of 10 gross (10 net) oil sands evaluation wells in northeast Alberta as part of the process of quantifying and evaluating Perpetual’s significant heavy oil/bitumen landholdings at Liege, Hoole and Panny.
The company is targeting a 15% weighting of oil & Liquids production by the end of 2011. The gassy resource plays mentioned above are all liquid rich where each LNG barrel sells for more than $50. This is clearly an investment in game changers and an exposure to a recovery of natural gas prices now that they’ve hit unsustainable low levels (did they?). The 100% natural gas strategy is of the past and PMT is starting to execute as planned.
I am currently a shareholder of Perpetual Energy. I was not paid any fees to feature this stock. I am just sharing my research. Please do your own due diligence before buying or selling any security.