Pengrowth Energy Corp. (TSX:PGF)(NYSE:PGH) issued a stark warning to investors late last year. The company basically said that unless it made significant progress on deleveraging its balance sheet, it might breach its financial covenants, which could cause all its debt to become due at once. However, since that time the company has taken several steps to address the issue, pushing its doomsday clock further away from striking midnight.
Getting some breathing room
In the company’s third-quarter report last November, Pengrowth warned that it was on pace to breach its financial covenants in the middle of 2017. However, during the fourth quarter, the company took a significant step away from the brink by selling a gross overriding royalty interest in its Lindberg asset for $250 million in cash.
As a result of that deal, and its ability to generate some excess cash flow, it was able to repay its credit facility as well as a portion of its 2017 debt maturities. In addition, the company received a waiver from its creditors to eliminate one of its covenants.
Because of this progress, the company noted in its fourth-quarter report this past February that it now anticipates that it could remain in compliance with its remaining covenants through the end of next year. That said, to do so, the company projected that it would need to access the capital markets before the end of this year, and that it would need to see some improvement in oil and gas prices.
However, the company also said that it intended to continue pursuing asset sales, which could raise the cash it needed to pay down debt and give it more breathing room.
Making more progress
Those efforts to sell assets paid off last week after the company announced two transactions. In the first deal, Pengrowth said that it found a buyer for a portion of its Swan Hills assets. Under the terms of that agreement, the company sold properties that currently produce 4,920 barrels of oil equivalent per day (BOE/d) for $180 million in cash. The company stated that it planned to use $100 million of that cash to repay a portion of debt that’s scheduled to mature later the year.
That said, one of the downsides of this deal is that the company will lose the associated production and cash flow. As a result, the company reduced its full-year guidance for production from a range of 50,000-52,000 BOE/d down to 47,000-49,000 BOE/d, while also reducing funds flow guidance from $195 million to $170 million. However, that’s the price it needed to pay for some more breathing room.
Speaking of which, Pengrowth got itself some more space a few days later when it announced the sale of some non-producing lands in the Montney shale for $92 million. That sale is noteworthy because those assets were not generating any current production or cash flow for Pengrowth, so it will not see any negative financial impact from the deal. Instead, it was able to capture the value of the land and use that cash to bolster its balance sheet.
Investor takeaway
With last week’s asset sales, Pengrowth has taken another step closer to ensuring its long-term sustainability in a low-oil-price world. Given the cash inflow, the company might not need to issue equity at its currently depressed stock price just to stay afloat. That said, while the company’s finances are clearly heading in the right direction, it still has much more work left to do before it can thrive in the current volatile oil-price environment.
