Horizontal drilling techniques provide the potential for
increased production levels in Pengrowth's mature light
Pengrowth holds a large and diversified portfolio of assets
that are equally weighted for oil or natural gas production.
Pengrowth will leverage existing infrastructure at the
Lindbergh heavy oil project, which will allow the firm to
save on construction costs compared with a greenfield
Historically, Pengrowth increased production through
acquisitions. Management has not yet proved its ability to
materially increase volumes through the drill bit.
Tertiary recovery in the Swan Hills region could effectively
raise reservoir recovery and production levels, but the lack
of an affordable source of CO2 negates the company's
prospects at this time.
Pengrowth's plans for further development in the
Montney and Horn River have been shelved because of
low natural gas prices.
Financial Health:Pengrowth has benefited from higher oil
prices, which at its current pace of development will allow
the company to build up cash on its balance sheet. The
company retains a CAD 1.25 billion revolving credit facility,
which was 60% undrawn as of the first quarter of 2012. The
company's nearest maturity dates for long-term debt are in
2013 and 2015, as construction spending at Lindbergh will be
ramping up. Based on our current estimates for commodity
prices, production growth and capital spending, we would
expect Pengrowth to be in violation of financial covenants
(specifically its total debt to total capitalization covenant of
50%) by 2013, before additional external financing. We
expect the firm will issue additional equity, which we
estimate will need to be about CAD 300 million-CAD 350
million per year in each year of our forecast in order to
maintain its dividend payments and avoid breaching debt
covenants. More preferably, the firm could sell assets to pay
down debt levels, or cut its dividend.