NEW YORK (TheStreet) -- When oil prices plummeted to their lowest levels in five years on Friday, Pengrowth Energy (PGH) took it on the chin. The small Canadian oil and gas producer, valued at $1.6 billion, saw its shares drop 17% during the week.
Investors may have overreacted, however. The Alberta-based company has attractive crude oil hedges, and its flagship project could start pumping oil as early as next month.
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Pengrowth gets most of its output from the Canadian provinces of Alberta and Saskatchewan and pays attractive dividends to investors. (The current annualized yield is 13.8%.) Pengrowth has struggled with profits however, in part because of weakness in natural gas prices. It is now increasing its focus on crude oil and related liquids.
In this context, lower oil prices raise concerns about the company's future and its ability to continue paying dividends. Pengrowth is expected to report a net loss this year while its operating cash flows could sink by 11%, as forecast in an Oct. 31 report from AltaCorp Capital's analyst Nick Lupick.
The dividend fears are understandable because Pengrowth and peers such as Enerplus (ERF) reduced their distributions when oil and gas prices tanked two years ago. Last week, Seadrill (SDRL) , an offshore driller in the energy sector, suspended its dividends in part because of the weak crude price environment.
Waseem Khalil, a Pengrowth representative, did not respond to requests for comment from TheStreet.
Despite the concerns, Pengrowth is in a position to sustain lower crude prices in the coming years. The company has hedged 63% of its crude oil production for 2015 and 33% for 2016 at nearly $83 a barrel. This should protect the company's cash flows even if crude remains around $80 a barrel or lower, said Lupick. Credit Suisse analyst Jason Frew said in an Oct. 30 report that the company's hedging activity "should insulate the dividend" from the risks related to lower commodity prices.