PENGROWTH ENERGY TRUST $20 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 247.9 million; Market cap: $5.0 billion; SI Rating: Average) is one of North America’s largest energy royalty trusts. Pengrowth produces oil and natural gas from properties in Alberta, British Columbia and Saskatchewan. It also owns 8.4% of the Sable Offshore Energy Project, which extracts natural gas from several fields south of Nova Scotia. Natural gas accounts for roughly 60% of Pengrowth’s production, while oil supplies the remaining 40%.
Pengrowth focuses mainly on high quality, mature properties that give it plenty of steady cash flows. In the past three years, it has acquired properties that have increased its reserves by 45% and its production by 63%. Based on current production levels, Pengrowth’s reserves should last at least 10 years.
Pengrowth uses hedging contracts to lock-in selling prices and stabilize its cash flows. Due to the sharp rise in oil prices in the past few months, Pengrowth had to write down the value of these contracts. Unrealized foreign exchange losses have also weighed on its profits.
Consequently, Pengrowth lost $0.23 a unit in the three months ended March 31, 2008, compared with a loss of $0.29 in the year-earlier quarter. However, cash flow per unit grew 55.4%, to $0.87 from $0.56. Revenue rose 6%, to $457.6 million from $432.1 million, as higher oil and gas prices offset a 7% drop in overall production.
Pengrowth paid out 77% of its cash flow as distributions in the latest quarter, down from 135% a year earlier. Pengrowth’s improving cash flow should let it keep paying monthly distributions of $0.225 a unit (13.5% yield), as well as replenish its reserves through drilling and acquisitions. Long-term debt of $1.25 billion is a reasonable 25% of market cap or 1.4 times annual cash flow.
For the remainder of 2008, Pengrowth has hedged about 46% of oil production and 41% of its natural gas output. These contracts will likely limit Pengrowth’s 2008 earnings to $0.68 a unit, which implies a p/e of 29.4. However, the units trade at a more reasonable 6.3 times Pengrowth’s forecast cash flow of $3.15 a unit.
Pengrowth is a buy.
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