In its monthly survey of security analysts’ recommendations on more than 1,000 Canadian companies, Investor’s Digest of Canada featured two recently published reports on the second and fourth most frequently recommended stocks to sell.
It’s hard to believe that Bellatrix Exploration Ltd. (TSX—BXE) was once worth billions of dollars. But after a debt albatross robbed it of that heady status and threatened its ability to remain a going concern, the oil and gas stock recently reached a recapitalization deal.
On Mar. 29, 2019, Bellatrix announced a proposed recapitalization transaction designed to improve and strengthen its overall financial position. The deal would reduce the company’s total outstanding debt by approximately$110 million (approximately 23 per cent), reduce annual cash interest payments by over $12 million annually until Dec. 31, 2021, and ensure that Bellatrix has no debt maturity dates in respect of any non-revolving debt until 2023.
In connection with the recapitalization transaction, Bellatrix has entered into support agreements with holders of approximately 90 per cent of the senior unsecured notes and a holder of approximately 50 per cent of the convertible debentures. Pursuant to the support agreements, the initial consenting note-holders and the initial consenting debenture holder have, among other things, agreed to support the recapitalization transaction.
Energy stock Bellatrix #4 on top-10 ‘Sell’ list
Jeremy McCrea and Rahul Pandey, two Raymond James analysts, say in a recent research note that they were not the least bit surprised about the recapitalization development.
“As we have previously mentioned, Bellatrix’s high-debt situation created the likelihood for future equity dilution,” say the analysts. “Although we weren’t surprised on the recapitalization proposal, we are partially concerned the pro forma structure hasn’t gone far enough to address the over-leverage problems. Based on the closing price prior to the announcement, equity investors will now own 16.5 per cent of the go-forward entity. Implicitly though, this means the exchange of $110 million in notes has debt holders valuing the company’s market cap at $132 million or $0.27 per share.”
Messrs. McCrea and Pandey say that Bellatrix’s higher leverage, compared to its rivals, after the recapitalization means that risks are still high, which is why they reiterate their ‘underperform’ recommendation and their $0.25 target share price.
Of the two securities firms that cover Bellatrix, both rate it a ‘sell’. This puts the company in the number four slot on our top-10 ‘Sell’ list.
3 ‘sell’ and 1 ‘hold’ vote for energy stock Pengrowth
Oil and gas stock Pengrowth Energy Corp. (TSX—PGF) just about put up a ‘for sale’ sign when the company, after coming up short in a bid to renegotiate its debt pile, kicked off a strategic review.
In March, the company’s board of directors commenced a formal process to explore and develop strategic alternatives with a view to strengthening Pengrowth’s balance sheet and maximizing enterprise value. Pengrowth, which has retained Perella Weinberg Partners LP and Tudor, Pickering, Holt & Co. as advisers to assist in undertaking the strategic review, said that all options are on the table. And this includes a possible corporate sale.
In addition to Pengrowth’s long-life, low-decline assets, the company also has potentially attractive tax attributes that complement its strong base operations.
In a March research note, Calgary-based AltaCorp analyst Nick Lupick says that Pengrowth’s fourth-quarter performance last year beat expectations. He adds that the company’s management continues to work towards extending or renewing its $330 million credit facility. It has drawn $173 million on it, adds the analyst.
“Strong risk tolerance” needed to buy Pengrowth
A couple of weeks later, however, Pengrowth announced arrangements for the extension of the maturity date under its secured revolving credit facility through Sept. 30, 2019, subject to certain terms.
The analyst notes: “Through the repayment of approximately $1 billion of debt, Pengrowth has undergone an impressive transformation in an effort to reinforce the company’s standing as a viable going concern entity with a focused asset base of low decline thermal oil production and high impact resource Montney development.
“However, given the elevated leverage at strip pricing and continued weakness in the Canadian crude markets, investment in Pengrowth should be made by only those with a strong risk tolerance and a constructive outlook on crude oil pricing.”
The analyst reiterates his ‘underperform’ recommendation but lowers his target share price to $0.60 from $0.75.
Three of the four analysts who cover Pengrowth rate the company a ‘sell’ and one rates it a ‘hold’. This puts the company in spot number two on our top-10 ‘Sell’ list.
This is an edited version of an article that was originally published for subscribers in the April 26, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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