Time For Some Optimistic Views.....
1) That oft-repeated refrain: "The cure for low prices is low prices"
If natural gas prices remain in the gutter over next 12 months, it will be survival of the fittest in the Canadian energy patch, which means the weaker players will either go under or shut in production if they simply cannot operate profitably, perhaps not even with their fixed TRP transportation contracts if the sale prices they can fetch can’t come close enough to cover their costs of production without putting them in critical condition financially.
I believe PEY is one of the strongest players, and if they are able to stay productive and sell the hedged portion of their gas profitably while adjusting their excess production based on market conditions, they should be in good shape to capitalize after the storm is over as there will likely be fewer companies in operation (or at least far less gas being produced).
2) I think Gee Gets It
Gee may have been whistling past the graveyard right up to and including the Q3 2017 results on November 9 when he continued appeared bullish on keeping the dividend as is through the winter along with a desire to possibly add a number of new properties, do more drilling, etc..….It appeared he was oblivious to the possibility that things could get worse before they get better. Granted, the onset of winter logically offered optimism on AECO prices, but when there’s this much gas available, any significant draw can be overwhelmed by the massive amount of readily-available supply poured back into the system. With the new strategy announced recently, I think he’s realized he risks the financial stability of the company if he doesn’t scale back on his ambitious plans, find savings outside of the cost of production, and diversify away from AECO.
I must confess I too was bullish on PEY expansion as I agreed with PEY’s past tendency to take advantage of bear periods by acquiring land, labor, equipment, etc. when it was cheap and reap the benefits when things recovered……It appears though, that “this time really IS different” and defense is the best offense.
I think Gee has done an amazing job with the hedging (wonder how many other players have a hedge book that looks better than PEY’s…?) and, coupled with his revised strategy, should put PEY in a much better position going forward than most others in the gas patch. I too have found religion re. focusing on paying down debt and tempering production vs. my personal fondness for share buybacks……If PEY uses the (by my calculation) approximately $100 million in annual savings via the dividend cut to pay down debt and perhaps buy back 1 or 2 million shares to show the market there was substance to the NCIB, I think PEY should end up in much better shape than many of its competitors.
3) The Dividend Cut
This was not a mistake. In fact, I would have preferred to see a bigger cut….perhaps down to 4 or 5 cents a month. While I think cutting the dividend entirely would have induced genuine panic in the market while dividend investors bailed out en masse, one sizeable cut like the 5 cents per month PEY decided on is prudent in my view. The dividend cut (or I guess more accurately, the sum total of all components of the revised strategic plan) was viewed as a positive by the market as, on the first day of trading after the announcement, PEY shares closed up over 4%, far better than any of their peers, so some combination of shorts covering / longs stepping in took place in response to the announcement.
4) Ben Graham:
“In the short run, the market is a voting machine. But in the long run, it is a weighing machine.”
During this time of turmoil in the Canadian Natural Gas business, the share prices of all Canadian energy companies that focus on natural gas E&P are getting mauled. Events like analysts’ downgrades, rumours, short theses, etc. can cause a big drop in the share price of any company in the sector on any given trading day, regardless of relative quality. However, eventually, the cream rises to the top, marginal players are exposed / expire, and the quality names get their due reward. Of course, the timeline is unknown, and no company is a sure-thing to come out the other end a big success, but the better quality the companies provide better probabilities of an eventual payoff.
5) The Next Six Months
The two dates of interest to me are the next two earnings announcement dates (Q4 2017 sometime in and around early March and Q1 2018 at some point in the vicinity of early May). I believe PEY will likely produce good numbers for both quarters given their hedges and, in the case of Q1 2018, the first effects of the new strategic plan. If PEY delivers good results/profits for shareholders, covers their reduced dividend with earnings in Q1 2018 (with some room to spare), and shows some debt reduction has taken place and some shares outstanding have disappeared, I think they will compare very favorably with their peers….Let’s see which company(s) can best weather this storm…..