Another mid-stream Canadian oil and gas producer bites the dust – Pengrowth Energy

… I’m not talking about Ovintiv either (TSX: ECA), which is pretty much an admission that any dot-com name for a company has already been taken up, so companies now have to resort to pharmaceutical-style naming conventions for their firms.

Pengrowth (TSX: PGF), which I have written about extensively in the past on this site, announced on Friday they were going to accept a takeover bid of CAD$0.05/share plus the payout of debt. The amount of debt outstanding was approximately $700 million and the total purchase price is $740 million.

The effect on their stock price was fairly dramatic:

It reminds me of the expression I tell people around me when they mention that something is cheap at 20 cents per share – “When it goes to zero, your loss is always the same – 100 percent”. In this case, investors took a 75% haircut on the last Friday of trading after the announcement.

This is the next (former) mid-tier oil and gas player to effectively go belly-up, the previous one being Bellatrix Exploration. At the rate things are going, only Suncor will be the last one standing in Canada.

The buyout of Pengrowth is going to be interesting for a couple reasons.

One is that the press release does not make mention in any way of any shareholder consent agreement from Seymour Schulich, who owns 28% of the company. Perhaps he is planning on taking a huge capital loss. One does not do big merger deals without getting consents from major shareholders with deep pockets, so the absence of this is very mysterious. To reverse the merger will cost some other suitor $45 million dollars – in light of the existing deal, this is a huge windfall that would be paid out if somebody were interested in the assets.

However, I deeply suspect in the shopping around process they couldn’t find anybody that was willing to finance the company at an acceptable price. The management information circular that will come out should yield some further clues on the process they undertook.

The other is how the deal is structured – Cona Resources used to be public, but it was majority owned by the Waterous Energy Fund, which is relatively secretive in its dealings (it is private). Waterous took its minority share of Cona private in May 2018 and we can infer from its SEDAR filings that were available that this entity is still not making money. Cona was bought out at about 45% of book value ($2.55/share on 101 million shares) coupled with $332 million in debt.

That said, Pengrowth, stripped of its leverage situation, actually makes money. Not a lot (especially in the current Canadian context), but while I am not surprised that shareholders are taking a massive bath on the company, I am surprised that this is the best agreement they could find. I am guessing the existing debt holders were completely unwilling to consider a debt-for-equity swap.

If Canadian oil and gas does come back from the dead, however, Pengrowth’s thermal oil assets are top notch and Waterous will be making a mint on this one. They effectively are going to wait this one out until the climate gets better. Parking $740 million of capital to do this seems like a reasonable gamble. I can see why they made it.

My last position in Pengrowth was in their unsecured convertible debentures, which matured at par in early 2017. I’ve been tracking it ever since and have taken no positions in their stock.

Genworth MI Q3-2019: Steady as she goes

I’m catching up on quarterly reports, so these posts are coming in a little late. This will be a short one.

Genworth MI (TSX: MIC) reported their third quarter results. They are largely unsurprising and they continue to be a cash machine as there have been no material issues concerning the Canadian housing market (as it relates to the mortgage-insurable side of the business – the high end market in Vancouver, BC is getting slammed because the provincial government is massively increasing the cost of carry for $3 million+ assessed value properties). Loss ratio is 18%, expense ratio is 20%, and they continue to take in a ton of cash simply because mortgage delinquencies and defaults are incredibly low.

As a result in this year, they’ve declared special dividends of $1.85/share so far and also have spent some capital on share buybacks – although since their currently share price is above book, management opts for the special dividend route.

There are only two issues that I will note.

One is that there is a brief mention of the impact of transition away from Genworth Financial’s shared services – since MIC’s majority stake (56.9%) is being bought out by Brookfield Business Partners, MIC will have to build its own services currently being purchased from Genworth, and this will cost money. It is also not entirely known about the exact impact of this, whether Brookfield intends on using Genworth MI as a currently existing cash machine, or whether they have strategic plans for the entity. The common shares are also at $53, which is significantly above the book value of $46 (which historically has been a rare situation) and it is almost as if the market will expect a follow-on bid to take the rest of the 43% out of the market. We will see.

The other note is that the company’s portfolio of preferred shares has also been a victim of the 5-year rate reset plague which has depressed prices of such preferred shares – they are now sitting on a $107 million unrealized loss on their current fair value of $494 million – or 18%.

Otherwise, the company seems to be doing very well. There does not appear to be any hints that CMHC wishes to apply any semblance of pricing pressure in the marketplace, which would be the biggest risk to MIC’s share price. One would have presumed that the Government of Canada would want to make life more affordable for the middle class homebuyer, but I am the first one to know that the words coming out of politicians’ mouths should always be verified by the actions of the bureaucracy underneath them!