Pengrowth Energy (NYSE: PGH) has one aim this year: Survive to thrive. To achieve that objective, the company is pushing down costs to squeeze out as much cash flow as it can, which it intends to use on debt reduction. During the third quarter, Pengrowth made some progress on each goal, though it still has a long way to go before its survival is a sure thing.
Operating expense guidance: Down $7 million from last quarter
Pengrowth's relentless focus on reducing costs is paying dividends. During the third quarter, the company noted that it achieved further improvements in operating expenses. As a result, it now expects expenses to be $72 million below its original guidance, which is $7 million better than its expectations last quarter. Additionally, the company continues to make progress reducing other costs, with cash general and administrative expense falling $18.6 million while transportation expenses are down $10.4 million from the year-ago quarter.
Oil producers have done an exceptional job driving costs down over the past year. Leading oil sands producer Suncor Energy (NYSE:SU), for example, pushed the cash costs in its oil sands operations down 18% last quarter to $22.15 per barrel, which is their lowest level in over a decade.
Funds flow: Up 38% from last quarter
These cost reductions have enabled producers to generate more cash flow than they would have otherwise. Suncor Energy's cash flow rose 7.6% last quarter despite the fact that oil prices were lower year over year. Meanwhile, Pengrowth's cost reduction efforts helped push its funds flow up a remarkable 38% over just last quarter to $122.7 million.
That said, a significant portion of that was due to hedging gains the company realized during the quarter. Overall, the company realized $104.4 million in its hedges, which included monetizing $41.6 million of 2018 and 2019 hedge contracts. Needless to say, without those hedges the Pengrowth's funds flow would have been much lower.
Total debt: Reduced $416 million over the past year
The reason Pengrowth's focus this year has been on its very survival is due to the amount of debt it has outstanding -- in particular, the debt maturing next year. As of the end of last quarter, total debt stood at $1.7 billion, which is down by $416 million over the past year. That said, what's most pressing about Pengrowth's debt is the fact that it has a $127 million convertible debenture due at the end of March and $400 million of notes maturing later that year.
Because of those impending maturities, Pengrowth has been trying to generate as much cash as possible to bolster its cash position, which now sits at $139.5 million. Given its solid hedge book, the company estimates that it will end the year with about $200 million in cash. So, it will have the money to pay off those convertible debentures and a portion of its notes.
However, a more pressing problem is the fact that Pengrowth is getting awfully close to breaching its financial covenants. As things stand right now, the company believes that it will remain in compliance through the middle of next year. However, unless oil and gas prices improve, or it sells assets, it might not be in compliance during the second half of 2017. Because of that, the company is negotiating with its lenders to seek amendments on those covenants to give it a bit more financial flexibility as it works to pare down debt.
Pengrowth Energy continues to take steps forward on its aim to survive the oil market downturn. That said, they have been baby steps, partially supported by the company's decision to monetize some of its oil hedges a couple of years early. What the company needs is a significant step forward to push back or eliminate the massive overhang of a potential mid-2017 covenant breach. Otherwise, Pengrowth might not make it.