Life has not been fun in recent years for investors in Pacific Rubiales Energy Corp. (TSX:PRE). The Toronto-based energy producer’s shares have declined by over 90% since March 2011 (despite a nice gain on Monday). Ouch.
Yet over this time, the company has raised its dividend twice. As a result, the dividend is now extremely tempting. To illustrate, you can buy the company’s shares for $3.47 apiece (as of this writing), and that gets you a dividend of US$0.165 every three months. After converting back to Canadian dollars, you’re looking at a yield of well over 20%. This is the highest yield on the S&P/TSX index.
Clearly investors are expecting the company to cut its payout. But in a news release in mid-January, the company left its dividend untouched. In fact the payout wasn’t even mentioned.
This all leads to a couple of big questions. One, is the dividend safe? And two, should you buy Pacific Rubiales stock? Below we take a look.
A deeply troubled company
Pacific Rubiales was once a “darling” in the oil industry. But in recent years, the company has been hit by declining oil prices, operational issues, and US$4.5 billion in debt. The debt load is particularly concerning, because the company only has a market value of $1.1 billion.
Making matters worse, Colombia (which accounts for over 98% of the company’s production) isn’t exactly a low-cost region. The main problem is a lack of infrastructure — as a result, most oil is transported by trucks (rather than rail or pipelines), which significantly adds to costs. In today’s oil environment, which can best be described as a war of attrition, Pacific Rubiales is not well-positioned.
In fact, there have been concerns about the company’s ability to repay its debt. Two of its bonds trade below 70 cents on the dollar. In mid-Janurary, while announcing a capital budget cut, CEO Ronald Pantin denied rumours that the company is nearing default.
An unaffordable dividend
Let’s take a look at the numbers. In its most recent update, the company said it expected cash flow of US$1.1-1.3 billion, based on an oil price of US$55 to US$60 per barrel. And all of this cash flow would be spent on exploration and development capital expenditures.
So where does that leave the dividend? After all, this dividend costs the company over US$50 million every quarter. And Pacific Rubiales has less than US$500 million in cash on its balance sheet. So unless the oil price recovers, then this dividend looks to be in big trouble.
So what should investors do?
If oil does recover, then this company could see spectacular gains. Just look at what the stock did on Monday. But this is still an extremely risky bet, one that you shouldn’t make just because of a big yield.
Instead, if you’re looking for reliable dividends, you should check out the free report below for three companies you can actually count on.