I’ve been sifting through the Pengrowth Energy filings in my spare time over the last couple weeks, and was not surprised to see them cut their distribution by 10% on September 14.

Reading through the Q2 financial results, I noted that their POR (pay out ratio) is 94%, which is fairly steep, especially for an oil and gas production company.

The fact that they are turning around and paying out 94% of their cash flow does not leave them much for capital expenditures and drilling.

“Development capital for the second quarter of 2007 totaled $44.4 million with approximately 82 percent spent on drilling and completions. Pengrowth participated in drilling 34 gross (15.3 net) wells with a success rate of 94 percent. In addition, Pengrowth participated in the drilling of three injection and one water disposal well (0.9 net).” -Source

That sounds impressive, however $44 million in development capital isn’t all that much considering the cost of services in the oil patch these days.

Also be careful when you read that Pengrowth “participated in drilling 34 gross wells” during 2007. That does not mean that PGH owns the 100% working interest in the wells, it just means they own some working interest in 34 wells. In short, they partnered with some other company to drill the wells.

In a letter from James Kinnear, CEO of Pengrowth, he states:

“Distributions to unitholders during the quarter totaled $0.75 per trust unit and Pengrowth has maintained the monthly distribution at $0.25 per trust unit since December 31, 2005. However, distributions can and may fluctuate in the future. Distributable cash is derived mainly from producing and selling our oil, natural gas and related products and as such, distributable cash is highly dependent on commodity prices. Pengrowth’s board of directors will continue to examine distributions on a monthly basis while considering overall market conditions to set the distribution level each month.” -Source

With crude prices above $80 per barrel, and gas prices maintaining levels above $5 per MCF all summer, it just doesn’t make sense that PGH is cutting their distribution at this time.

I like the DRIP program they’ve made available to US investors. However watching them pay out a better part of their cash flow each month, and only having 6% of that cash flow to use on CAPEX and drilling does not make me feel comfortable dropping a lot of money in the stock, no matter how high the distribution…

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