Why Pengrowth Earnings Could Keep Slowing

Pengrowth Energy (NYSE: PGH) will release its quarterly report on Thursday, and with shares having climbed recently, investors seem to be expecting good things from the company. Yet Pengrowth earnings expectations don't appear to be behind the jump in the stock lately, with some one-time events drawing the bulk of investor attention instead.

As a former Canadian royalty trust, Pengrowth had to transform itself into a corporation to comply with tax law changes. Despite being a generous source of dividends, the stock has seen its price perform very badly over the past couple of years. What's behind the company's weak results? Let's take an early look at what's been happening with Pengrowth Energy over the past quarter and what we're likely to see in its quarterly report.

Stats on Pengrowth Energy

Source: S&P Capital IQ.

Will Pengrowth earnings ever grow higher?
Analysts have had mixed views on Pengrowth earnings in recent months, cutting their June-quarter estimates roughly in half but slightly narrowing their loss expectations for the full 2013 year. The stock, however, has been unequivocally positive, rising 18% since late April.

Pengrowth has had substantial success with its Lindbergh bitumen project, located in east-central Alberta near the border with Saskatchewan in Canada. Earlier this month, the company boosted its proved plus probable reserves from the play by 51%, reclassifying some formerly contingent resources as reserves. The project, which involves heating viscous bitumen in order to free oil for pumping, involves substantial capital investment but has great potential as well.

But most of the attention that Pengrowth has gotten lately is in connection with the sale of more than $700 million in non-core assets. Among the sales were a $510 million purchase of properties in southeastern Saskatchewan to a junior oil and gas company, as well as another $200 million from other assets. Having met the $700 million goal, Pengrowth now considers the first phase of its Lindbergh project fully funded.

The biggest worry that some investors have about Pengrowth is that its dividend is large compared to its earnings. Similar issues forced Penn West Petroleum (NYSE: PWE), also a former Canroy, to cut its dividend a couple months ago. Although extraordinary measures have helped Pengrowth and Enerplus (ERF -0.68%) sustain payouts at levels that were last reduced in the middle of 2012, both companies could eventually see further pressure on their payouts in future.

In the Pengrowth earnings report, watch to see how the company's work on Lindbergh is going. Without unqualified success there, it'll be hard for Pengrowth to accomplish its financial goals and reward shareholders in the long run.

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