How Pengrowth Energy Corp Added $1 Billion in Value Virtually Overnight

By Markets


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Troubled Canadian heavy oil producer Pengrowth Energy (NYSE: PGH) knows that it is sitting on a lot of oil at its Lindbergh resource in western Canada. The company was able to further confirm the value of that asset after petroleum engineers reclassified some of Lindbergh's reserves, adding nearly $1 billion to their value. That said, turning the value of the reserves into value for shareholders is going to take a lot more work.

Drilling down into Lindbergh

Pengrowth Energy recently received approval to move forward with the phase two expansion of Lindbergh to boost its capacity from 12,500 barrels-a-day up to 30,000 barrels per day. As a result, the company was able to move 44.5 million barrels of oil to its proved reserves, which are those that Pengrowth is reasonably certainit can produce in the future. That boosts the company's total proved reserves at Lindbergh by 43% and up to 147.9 million barrels. In addition to that, the company was able to add 55.7 million barrels to its probable reserves, boosting them up to 319.1 million barrels, which is 21% more than it had at the end of last year.

As a result of these reclassifications, the company was able to update the before-tax value of Lindbergh's reserves. That value jumped 63% to $2.55 billion, or $4.66 per share, which is up nearly $1 billion from the end of last year.

Pengrowth Energy believes thatthere is even more value to be captured at Lindbergh in the future as it develops the asset. According to the company, it has $6.6 billion of future capital reinvestment potential at Lindbergh, which could unlock even more reserves and drive production growth for years to come.

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Debt stands in the way of development

The problem for Pengrowth is that it just doesn't have the money to invest in Lindbergh's growth right now. In fact, the company is not spending any money on drilling this year and only allocated a minor amount of capital to advance Lindbergh closer to phase two. Instead, the company's aim this year is to generate excess cash flow and sell assets to address its 2017 debt maturities, which currently total $527 million. In addition to that, the company has another $280 million in debt maturing in 2018 that it will need to address.

Pengrowth's decision to curtail investments to address its financial situation is a common approach in the sector these days. Fellow Canadian producers Baytex Energy (NYSE: BTE) and Encana (NYSE: ECA) have also spent the past year working to improve their balance sheets to reposition for future growth. In Baytex Energy's case, it reduced net debt by $39 million last quarter by generating excess cash flow. In addition to that, Baytex Energy entered into an agreement to sell $55 million of non-core assets last quarter, and it anticipates completing additional asset sales this year.

Encana has been even more aggressive with asset sales, selling $1.1 billion in assets last quarter, with all but $200 million of that cash going toward debt reduction. In addition to that, Encana recently issued $1 billion in equity, earmarking half of that money toward debt reduction. As a result, its balance sheet is much stronger, which positions Encana to drive double-digit production growth going forward.

Investor takeaway

While Pengrowth Energy can confirm that it is sitting on a lot of value at Lindbergh, it still faces an uphill battle to extract that value for investors. That is because it still has a mountain of debt to overcome before it can invest the necessary capital to grow its output at Lindbergh. While it has a plan to get its debt down, it has not been as aggressive as its rival, which could cause Lindbergh's oil to stayin the ground even longer.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.