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Pengrowth Energy (NYSE: PGH) is on a mission to survive so that it can thrive. As of right now its survival is very much in question because the company is running out of time as it seeks solutions to address its mountain of debt. So far, the steps it has taken to address its balance sheet woes have been very minor. Ultimately, it needs to do something big, and it needs to do it soon.
The clock is ticking
Pengrowth Energy currently has enough liquidity and financial breathing room to get it through the middle of next year. However, unless oil and gas prices vastly improve, the company is on a collision course with its debt covenants. In fact, the company noted in its third-quarter press release that it "may not remain in compliance with certain financial covenants in its senior unsecured notes and credit facilities during the second half of 2017" if conditions do not improve. The company pointed out that it is currently negotiating with lenders for amendments on these covenants, but there is no guarantee its creditors will be amenable to any agreement.
This situation is similar to the one that almost sank Penn West Petroleum (NYSE: PWE) earlier this year. Penn West Petroleum was also up against a midyear debt covenant deadline, which forced the company to take drastic action to stave off a potential default. Those efforts involved a rash of asset sales, including its core Slave Point and DodslandViking assets. However, because it received an excellent value for those assets, Penn West was able to repay the bulk of its debt, which has put it in a position to thrive in the years ahead. It is looking more likely that Pengrowth will need to undertake a similarly dramatic transformation to get itself back on solid ground.
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To this point, however, Pengrowth seems to be taking two steps forward and another back. For example, the company noted that as of the end of the third quarter it had successfully reduced its total debt by $203 million year to date. However, that represented a step backwardfrom the $225 million in total debt reduction it reported at the end of the second quarter. The culprit was foreign exchange fluctuations, which increased total debt from $1.63 billion to $1.65 billion. That increase came despite the fact that the company generated excess cash and monetized some of its commodity hedge contracts, which bolstered its cash position from $54.1 million to $139.5 million.
Notably, the company's total debt is not its most pressing concern. Even more critical at the moment is the fact that it has $127 million of convertible debentures maturing at the end of next March and $400 million of senior notes due at the end of July. The company has already started to work on that problem and recently called for the redemption of the convertible debentures, with the intention of paying them off in full by the end of this year. It has more than enough cash to meet that obligation after recently monetizing some of its commodity and currency hedge contracts, and it will come out with about $100 million in cash after redeeming those debentures. While that gives it a head start on its other 2017 debt maturity, Pengrowth will not generate enough money to pay that off at current commodity prices.
Because of that, Pengrowth Energy still might need to follow Penn West's blueprint and start selling core assets to get out ahead of its debt predicament. While the company noted last quarter that it continues to evaluate noncore asset sales, it found the market for these assets to be challenging given the current commodity price environment. However, because of the grave situation in front of it, Pengrowth Energy might not have any other choice but to part with one of its prized assets, such as a stake in the Lindbergh heavy oil assets or its Montney natural gas properties, which could fetch a premium value even in the current market. Doing so could ease its debt concerns, as well as provide the cash the company can reinvest in its remaining asset base, which is something it just can't afford to do right now.
Pengrowth Energy is running short on time. Because of that, it needs to step up efforts to address its debt situation, including exploring the possibility of parting with a core asset. It is a path that worked for Penn West and could be the key to Pengrowth's survival as well.
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