Pace shareholders voted to approve a deal that will create a new dividend-paying entity. But the fourth quarter performance of another recent convert to the dividend model might give them some pause
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
After more than two months of negotiations, arguments and counterarguments, the management of Pace Oil & Gas got the outcome it was looking for – barely. In a vote held yesterday, 69.7 per cent of Pace shareholders that cast a ballot did so in favour of the proposed deal that will see the company folded up along with AvenEx Energy and Charger Energy into a new dividend-paying company called Spyglass Resources. That’s just a few points above the two-thirds threshold needed to approve the deal.
Now comes perhaps the even harder part: generating enough free cash flow to pay the promised $0.27 per year dividend and fund its production growth. And if the 4Q12 results of another junior oil and gas company that recently switched from a growth-oriented company to a dividend-paying one are any indication, that could be a tough road to hoe. As FirstEnergy’s Cody Kwong noted in a report, Renegade Petroleum (TSE:RPL)’s $290.5 million of net debt is a troublingly large number, and 18 per cent higher than FirstEnergy was expecting. As a result, he said, “we believe the market will be anxiously evaluating the sustainability of its dividend paying business plan as it moves into its first full quarter of operations since converting.”
Renegade decided to hedge more of its production for 2013 in an effort to reassure investors about its ability to cover its dividend out of its operating cash flow, but that move could end up hampering cash flows in 2014. “In aggregate, we continue to portray an outlook where the company’s cash use versus cash flow ratio is 116 per cent in 2013e, which is an aggressive number, especially considering Renegade’s leverage.” FirstEnergy cut its price target on Renegade’s shares from $2.75 to $2.15 and rated them as “market perform.”