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Can PetroBakken maintain hefty dividend? Add to ...

It’s difficult to please everyone when you’re put up on a pedestal.

Calgary’s PetroBakken Energy Ltd. looked like a wonderful energy investment when parent company Petrobank Energy and Resources Ltd. announced in October that it would be spinning off its stake in the light-oil company. It was a fast-growing producer with a footprint in the hot Bakken unconventional oil and gas region, where asset values have been on the rise and big players have been sniffing for acquisitions. And PetroBakken’s 8-cents-a-share monthly dividend – equivalent to a yield of about 8 per cent on its stock price at the time – made the stock a darling of income-seeking investors, too.

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But developments since that announcement could put that dividend at risk. PetroBakken’s third-quarter output fell short of its previous quarter to an average 39,000 barrels of oil equivalent per day, and the company started shelling out cash to reach its exit production-rate guidance of 52,000 barrels or more daily. To please its growing investor base, the company hasn’t lowered its dividend, and has taken out $100-million in new capital expenditures in the race to achieve its exit guidance, putting pressure on PetroBakken’s coffers.

The company’s share price has fallen 14 per cent since the third-quarter report, amid concerns both about its production growth outlook and the long-term sustainability of the dividend. At its closing price of $10.68 Thursday, the dividend yield is now 9 per cent. But despite the already highly indebted company’s strategy of throwing more money into the ground in order to hit its production targets, analysts don’t believe there’s much risk to the oil stock’s hearty dividend.

There are plenty of reasons to be concerned about the stock, but they tend to come with caveats.

Weaker oil prices are hurting the share value, but that’s a blow being felt industry-wide. While production slumped in the third quarter, PetroBakken was producing about 45,000 barrels a day in early November, getting closer to its exit guidance.

The company, too, is highly leveraged, weighing on the share value in a down market. But, says AltaCorp Capital analyst Don Rawson, even though his calculations show a higher debt-to-cash-flow ratio than the rest of the exploration and production industry, PetroBakken is more comfortable with higher leverage than most other companies.

Even with the pressure coming from the jump in capital expenditures and high dividend payments, “they would be loath” to lower the dividend, Mr. Rawson said in an interview. “I think that would be way down on their list of their things to adjust.”

As the market adjusts and oil becomes stronger, PetroBakken should recover too, putting dividend worries to bed. In fact, Mr. Rawson even suggests the big dividend payout is strong incentive for shareholders to stick with the stock. Mr. Rawson, who reiterated his “outperform” rating for PetroBakken this week, is one of the majority of analysts who have positive outlooks on the company and its dividend in spite of outside pressures.

Cody Kwong, an analyst with FirstEnergy Capital, projected the company’s dividend would stay the same for 2013. He sees the main risk would be the company disappointing the Street by not hitting its exit guidance. If PetroBakken hits its 52,000- to 56,000-barrels-a-day mark, Mr. Kwong said, “it’s a new ball game.” He suspects that would convince analysts to move their projections higher, making the dividend a lot more sustainable.

PetroBakken works primarily in light-oil exploration and production in the southeastern Saskatchewan portion of the Bakken oil play. This week, the company announced it had bought 7 million shares in Arcan Resources Ltd., also entering a farm-in agreement for some of Arcan’s sections of the Swan Hills Beaverhill Lake formation, bringing PetroBakken’s total sections of land in the play to 90.

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