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Has Pengrowth Energy Corp Done Enough to Survive?

By Matthew DiLallo - May 31, 2016 at 11:32AM

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With a plan to survive to thrive, the troubled Canadian driller needs to reduce its debt so that it can be in the position to capture the oil market’s future upside.

Troubled Canadian oil producer Pengrowth Energy (NYSE: PGH) has an interesting tag line for 2016: "Survive to Thrive." It's the first part of the company's tag line that really speaks to how tough things are at the moment, with it running a real risk of sinking under its weighty debt load. That said, after reducing debt by $173 million during the first quarter it has certainly taken a step in the right direction, though it still has more work to do given the amount of debt it has maturing next year.  

Drilling down into the problem

As of the end of the first quarter Pengrowth Energy had $1.68 billion of debt outstanding, which is a lot for a $3.1 billion company. That said, the company does have some breathing room given that its current debt-to-EBITDA ratio stands at 3.1 times, which is well below its 4.0 times covenant. That's much more breathing room than fellow Canadian peer Penn West Petroleum (NYSE: PWE), which had a senior debt-to-EBITDA ratio of 4.6 times last quarter. Worse yet, Penn West Petroleum is creeping real close to its 5.0 times leverage covenant, with the company warning that it could breach that covenant at the end of the second quarter if its lenders didn't agree to an amendment to provide it with relief.

While Pengrowth doesn't have the same debt covenants worries as Penn West Petroleum, it does have its own looming debt deadline. That's because the company has $527 million in debt maturing next year, consisting of $127 million in convertible debentures and $400 million of long-term notes. Given the current weakness in the oil and credit markets, the company likely won't be able to refinance that debt at favorable terms. Instead, it will need to find a way to pay it back through a combination of internally generated cash flow, asset sales, and some other creative options.

Getting out ahead of the problem

Pengrowth has been making a lot of progress to address its near-term debt maturities. During the first quarter the company was able to repay $9.7 million of principal value of its convertible debentures at a significant discount to face value, saving the company roughly $1 million in value and interest. Further, it paid down its revolving credit facility by $163 million during the quarter, which left it with just $43 million outstanding on that $1.0 billion facility.

Looking ahead, the company plans to make additional offers to retire the convertible debentures and its term notes at a discount using excess cash flow generated in 2016. However, if it is unable to retire this debt on favorable terms it intends to use cash on hand and the availability under its credit facility to retire it upon maturity next year.

That said, ideally the company would only use its credit facility as a short-term option. That's why it is also targeting $300 million in asset sales this year. If the company is able to complete those asset sales it should have the cash, when combined with excess cash flow and possible favorable early debt reductions, to fully address its 2017 debt maturities while giving it a good head start on 2018 when another $270 million in debt matures.

Investor takeaway

Pengrowth Petroleum is clearly making progress on its survival plan after reducing debt by a net $173 million during the first quarter. However, to ensure its survival the company really needs to complete its targeted asset sales while also redeeming additional debt at a discount. Accomplishing both should ensure its survival even if oil prices remain weak for the next couple of years.

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