Warming Up To a Dividend Cut
Though I still believe a dividend cut is unlikely in the near-term given CEO Gee’s past comments, I’d be in favour of him changing course and announcing a sizeable cut at some point over the next couple of weeks.
Granted, all Canadian natural gas players are getting hammered, so it’s an industry-wide issue, not a PEY-specific one. Further, if PEY was going to cut the dividend, last summer / fall would have been a much better time to do it as, if memory serves, PEY was among the hardest hit re. share price declines during that period due to what I believe was significant investor skepticism on the sustainability of that dividend in the face of negative AECO prices (a view which I think had validity at the time and still does)……There’s were reasons why PEY’s share price dropped farther in 2017 than most other Canadian natural gas players and why PEY was one of the 10 most shorted stocks on the TSX according to a piece published about a month or two ago in the Globe & Mail or the National Post (can’t recall which), and I suspect the maintenance of the dividend was likely the biggest of those reasons.
Regardless of the company’s past decisions, the fact is that market sentiment plays a big role in determining the share price of a company over the short-term regardless of the relative quality of that company vs. others in the space, and right now, I believe market players are still skeptical re. whether PEY should be paying the current dividend amount given PEY’s inability to cover the dividend with earnings in recent quarters (which is, I believe, an actual policy of PEY management) and may continue not do so in upcoming quarter(s).
Here are the advantages I see in cutting the dividend now:
I would expect a significant jump in the share price almost immediately as most of the remaining shorts, stripped of the argument that the dividend is unsustainable, will likely cover and move on to easier prey.
Those looking to go long a Canadian natural gas stock would almost certainly look at PEY as their company of choice (or at least give PEY due consideration) since:
The dividend would now be viewed by far more potential longs as secure and sustainable.
PEY would likely be able to once again cover the dividend with earnings going forward.
The monetary savings from such a cut would be available to pay down debt, put into capex, buy back shares, etc.
Further, if the outlook for Canadian natural gas does turn bullish, PEY should experience a further boost in its share price as it tags along with the other natural gas companies on a new wave of optimism for the industry in general.
PEY shareholders who are long-term buy-and-holders should also gain an additional benefit from a dividend cut:
If you believe PEY is a good allocator of capital, there could very well be opportunities for PEY to acquire additional assets at distressed prices if higher cost / less efficient companies need to sell off assets to stabilize their balance sheet, or perhaps even go under if the current bear market drags on (the “buy when there’s blood in the streets / be greedy when others are fearful” strategy). PEY has stated in the past that they like to add to their land holdings / other assets when they are cheap. The payoff for PEY investors down the road would likely more than compensate for the reduction of the dividend if the cut allowed PEY management more financial breathing room to take advantage of current conditions an acquire good assets at rock bottom prices when they see an opportunity without further stretching their balance sheet to levels that would suggest a higher level of risk to investors.
If PEY does decide to cut the dividend soon, I think must be a meaningful (50% or more) and (hopefully) one-time in nature:
“Meaningful” so the market will feel confident that the new lower rate is safe and sustainable while simultaneously recognizing that the cut will translate into a significant monthly cash boost to a company known for delivering a good return on capital to its shareholders……
“One-time” because if the Western Canadian natural gas market, due to unforeseen circumstances, gets considerably worse over the next year or so (though granted, that’s hard to imagine), a smaller cut now may mean that a second cut is necessary at that point, and I think that would spook investors into thinking that PEY is in fact in trouble financially (regardless of the validity of such a concern) with the commensurate share price drop / fallout.
So, in a nutshell, a big dividend cut (50% or more) within the next couple of weeks would be my preferred next move for PEY. Hopefully CEO Darren Gee / The Board are at least seriously considering it.