Ensign Energy Cuts Dividend
Background
In late August, we did an in-depth analysis of Ensign Energy’s dividend yield, which at the time was 15.74%. We took a look at its competitors their relative financial positions and concluded that the dividend was simply unsustainable and management was stubbornly maintaining the dividend in an effort to keep its existing shareholders happy in the short term rather than do what’s best for the company in the long term. In short, Ensign Energy was a dividend-yield trap.
Since the time of writing, the share price has fallen from $3.05 to $2.68 - a 12.13% decline. Investors would have recovered a $0.12 dividend in September, but it has still made for about an 8% loss in just a few short months. But finally, Ensign Energy has reported that it has cut its dividend in half on the heels of a quarterly loss of $0.24 per share compared to a loss of $0.21 in the same quarter last year. In addition, it has suspended its dividend reinvestment plan which, according to our most recent Canadian Dividend Report (available for free in our Subscribers Area), gave a generous 5% discount on reinvested dividends. While there’s no denying that these results are poor, it is our opinion that this is the first actual responsible decision the company has made in a long time. And for that, it warrants a closer look.
Our Analysis
According to the news release, here are a few of the key highlights for the quarter compared to Q3, 2018:
Revenue of $393.5 million vs. $288.7 million
Net Loss of $-37.8 million vs. -$32.8 million (per share of -0.24 vs. -0.21)
Adjusted EBITDA of $0.60 per share vs. $0.44 per share
Funds Flow from Operations of $0.33 vs. $0.38 per share
Credit Facility of $178.5 million remaining.
In addition, the company stated that they have begun to realize synergies following the acquisition last year of Trinidad Drilling but at the same time, had higher interest expense which negatively affected their funds flow. In Q3 alone, they paid nearly $35 million in interest alone, which equates to about $0.22 per share.
In Q2, 2019, Ensign underwent some major debt restructuring by issuing $700 million worth of new senior callable bond issues due in 2024 at an interest rate of 9.25%. They used the proceeds to pay down the other $700 million senior loan they had. The Company chose to issue a callable bond as opposed to the prior non-callable bond. A callable bond allows the issuer (i.e. the Company) to repay the bond in full at various set prices throughout the term. What’s happening here is that Ensign Energy can pay back the bond if interest rates fall enough and then issue a new one at a more favourable rate. The flip side here is that they must pay a higher coupon rate than an otherwise equal non-callable bond, which is reflected in the 9.25% above.
The Company is operating at razor thin margins (gross margin was only about 5.5% in Q2, 2019) and still are saying they plan to pay out $0.06 per share in dividends per quarter. They still have normal operating costs to factor in, and of course the $0.22 per share, per quarter, in interest payments described above. Furthermore, the decision to issue callable bonds at higher interest rates because of a belief or hope that interest rates will fall and they can refinance at a better rate is a rather risky strategy for a company not able to take risks anymore. It’s time to rip off the band-aid and cut the dividend in its entirety and look at paying down debt as aggressively as possible. Why would you invest in a Company with no clear path to profitability, no matter what the dividend?
In the time it has taken to write this article, the shares of Ensign are down 12.31% to $2.35. Tempting of course, but I caution against chasing this one. Remember that as investors, you are part owners of a company. Until the management team can show they are capable of making the tough decisions, you’re better off looking at other companies in the industry.
Good luck and thanks for reading!