How Much Time Does Pengrowth Energy Corp. Have Left?

Many Canadian oil investors who have considered scraping the bottom of the barrel for value deals have looked at companies such as Pengrowth Energy Corp.  (TSX:PGF)(NYSE:PGH) as deep-value opportunities, as many oil and gas companies operating within Canada are beginning to be valued closed to (or, in some cases, below) the breakup value of the asset base.

Long-term catalysts for the oil and gas sector appear to be few and far between with the vast majority of analysts believing that a “lower for longer” commodity price environment is more likely than a swift and sustained rebound in commodity prices.

The Canadian oil and gas sector in particular has been hit hard over the most recent quarters due to the unfavourable economics of the underlying Canadian oil and gas resource base compared to other oil deposits, which happen to be cheaper to extract and more profitable to sell.

On Wednesday, Pengrowth announced mixed results of the company’s initiative to sell off a portion of its oil assets to reduce its debt load. While Pengrowth was unable to secure a sale of its Swan Hills asset, the company did announce a confirmed $300 million sale of its Garrington/Olds assets in southern Alberta. The total amount expected to be raised from asset sales, which are scheduled to close this this year at $827 million, is a decent step in the right direction.

Analysts and investors have largely shown a mixed response to the news, with shares trading sideways, noting that while these asset sales do benefit the company in its bid to become profitable again and avoid bankruptcy, the cash flow generation of these assets which will be foregone may put the company at risk of breaching debt covenants linked to its debt-to-EBITDA ratio.

While many firms attempt to avoid asset sales as a way of reducing debt, looking primarily to equity issuances first as a way of re-balancing an over-levered capital structure with the stock prices of many Canadian oil and gas firms currently severely depressed to levels at or near book value, equity issuances become increasingly less attractive as the dilutive effect of such offerings can often be catastrophic for a company’s already rock-bottom share price.

Bottom line

The situation Pengrowth finds itself in is not a unique one, as many Canadian oil and gas firms have engaged in talks recently about asset sales. The ability of Pengrowth to generate cash flow over the near to medium term will be the primary factor for investors to pay close attention to moving forward. I would remain on the sidelines until it is clear that Pengrowth will be able to continue as a going concern, something which, according to my analysis, remains uncertain at this time.

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Fool contributor Chris MacDonald has no position in any stocks mentioned.

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