AVFAvenex Energy: Dividend Sustainability Analysis and Outlook
April 16th, 2012 Category: Canadian Stocks, Market Analysis, Natural Gas, Oil, OpinionOne comment
Avenex surprised investors with a 20% dividend cut dropping its monthly distribution from
.045 to
.035 per share. The market retaliated swiftly by sending its shares 20% lower on that same day. The share price has since continued to drift lower signaling there might be more cuts to come. Is Avenex Energy’s dividend sustainable? According to my analysis, the answer is a conditional yes, let’s find out why.
Avenex Energy AVF.TO 3.96 [+0.03] is not your typical E%P company as it is composed of 2 divisions: Oil and Gas and the Elbow River Marketing. Revenue is approximately split 70/30 between the 2 divisions with the Oil and Gas segment accounting for the lion’s share. Besides Raymond James, the company doesn’t get any analyst coverage and that is probably because AVF has not issued new shares in years. The company is essentially an income play that mainly attracts retail investors chasing yield.
AVF’s production was initially targeted at an equal weighting between oil and natural gas but even though they ran a great hedging program on their natural gas in the past few years, it was the end of the road for them in 2012. Just like everyone else in the industry, they had not expected the magnitude of the collapse in natural gas prices. For 2012, in order to keep their POR at or below 60%, they had to cut the dividend as a reaction to losing 50% of their natural gas revenue which accounted for 33% of their cash flow. Furthermore, AVF has started shutting in unprofitable natural gas production which will take their 2012 average production down to 4,200 boe/d (55% liquids) versus more than 4,800 boe/d (47% liquids) in average production in 2011.
It’s time to look ahead into 2012 in order to find out how the dividend measures up to Cash flow. For this year, AVF will be paying
.45/share in dividends which include Q1 monthly dividends of
.045/share. The company will be averaging 4,200 boe/d 55% Oil + NGLs as a result of NG well shut-ins. Capital expenditures will be around $28M for the year. Elbow River Marketing will be generating $16M in free cash flow which is not really a conservative number but it is consistent with last year’s figures. Let’s run the scenario using the following price deck:
BTI Price Deck
- $85 Realized price per liquids barrel ($95 Edmonton Par)
- $2.00/mcf realized price for natural gas