Pengrowth - The Dividend Cut Is Not As Bad As It Seems

(All numbers are in Canadian dollars)
The news out of Pengrowth Energy (NYSE: PGH) confirms what many have been fearing for months. The company has announced plans to lower its dividend to $0.01 per share per quarter ($0.04 per share annually), down 83% compared to the prior dividend of $0.02 per month ($0.24 per share annually). This new dividend will result in the yield on the common stock dropping to 2.5%, versus the previous 15% yield. Pengrowth is also scrapping its Dividend Reinvestment and Optional Common Share Purchase Plan "DRIP".
Why did Pengrowth cut the dividend?
Based solely on its operating numbers, Pengrowth did not appear to need a cut in the dividend. Funds flow from operations, or FFO, a key metric for Canadian E&Ps for cash flows, came in at $111.5M in Q2 2015, or $0.21 per share. In Q1 2015, FFO came in at $113.0M, o $0.21 per share.
In other words, for the first two quarters of the year, Pengrowth generated $0.42 per share of FFO versus six monthly dividend payments totaling $0.12 per share, resulting in a modest payout ratio of just 29%.
Including capital spending, Pengrowth spent $50.8M in Q2 on capex and $30.8M for the dividend, resulting in cash outlays of ~$81.6M, or 73% of FFO, and ~$30M in free cash flow.
However, this move to lower the dividend was not made due to any concerns regarding short-term cash flows. Pengrowth has very strong hedges in place which have protected it from lower oil price this year and will do so again... Read more

Older articles featuring PGH: