Oil Investors: Don't Get Used to This 16% Yield

WHAT YOU MUST KNOW ABOUT DRONES Recently, we dispatched Marc Lichtenfeld to investigate the commercial drone space. What he uncovered was even bigger than we could have imagined... Regardless of your personal feelings about drones, you need to watch Marc's report. Because, as cyber-defense expert P.W. Singer puts it, "it doesn't really matter if you're against this technology... it's coming." Click here to watch. Wednesday, January 7, 2015 The Safety Net: Don't Get Used to This 16% Yield Marc Lichtenfeld, Chief Income Strategist, The Oxford Club The stocks of small oil producers have been getting annihilated. Some have already cut dividends because of plummeting oil prices, while others trade like they will slash them soon. Shares of Calgary-based Pengrowth Energy Corp. (NYSE: PGH, OTC: PGF) have been sliced in half since September, largely on fears that its fat monthly dividend will get a little leaner. Wealthy Retirement reader Bob Z. asked me to take a look at the company's dividend to determine whether a cut is likely. The company has paid investors C$0.04 per share each month since August 2012. Prior to that, shareholders were paid C$0.07 per month for three years. Red flag No. 1 is that the company has reduced its dividend several times since 2007. View larger image Red flag No. 2 is that the company doesn't generate enough money to pay its dividend. And that's before the effects of lower oil and gas prices. In the first nine months of 2014, Pengrowth's funds from operations (a measure of cash flow from operations) was C$389.9 million. Capital expenditures totaled C$645.2 million, giving the company negative free cash flow. Meanwhile, it paid shareholders $189.4 million in dividends. For the full year 2013, free cash flow was C$49.4 million while it paid C$248.1 million in dividends. The year before that, dividends of C$289 million far eclipsed free cash flow of C$71 million. In the recent past, Pengrowth has been able to pay the dividend with cash generated from sales of property. However, with the value of the resources in the ground on those properties substantially lower, the prices of those properties have likely declined. That may make it tough to generate enough money from sales of property to pay the dividend. One thing going for Pengrowth is its hedging program. For the fourth quarter of 2014, 77% of its volume was locked in at $94.51 per barrel - much higher than the roughly $50 per barrel on the open market today. This year, 63% of its volume is guaranteed at $93.99 per barrel. It also has hedges on natural gas, though less than half of next year's volume is locked in. The company is holding an investor day January 22 to discuss the lower commodity prices. With a current yield of over 16%, I wouldn't be surprised if the company reduces the dividend. It could cut the monthly payout by a penny per share and still yield above 12%. Even if the dividend were cut in half, an 8% yield in today's market would be appealing to many investors. The market is certainly acting like a dividend cut is coming. I suspect the market is right. Dividend Safety Rating: D If you have a stock whose dividend safety you'd like me to examine, leave the ticker symbol using the comment link below. And don't forget to search the Wealthy Retirement site to see if I've looked at your stock recently.   Recent Articles: Wealthy Retirement Warning Signs Your Dividend May Be Cut: If an investor had to determine dividend safety using just one metric, this would be the one to choose. And understanding it could keep you from being misled into thinking a dividend is safe. Top Tips From 2014: For my last column of the year, I thought I'd look back at the columns that resonated most with you and boil them down to the highlights. Think of it as the Cliffs Notes for a wealthy retirement. 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