Renegade Petroleum swaps growth for yield

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A small Alberta oil company is staging a dramatic shift from the typical business of junior energy companies, abandoning big growth in favour of big dividends.

On Tuesday, Renegade Petroleum Ltd. announced a complex series of transactions that will create a company with a strong 9.8 per cent annualized yield.

The move "introduces a new business model for the small-cap player," said Eric Nuttall, portfolio manager for the Sprott Energy Fund, and comes amid a broad change of course in the oilpatch. Years after tax changes killed the trust sector, a series of oilfield services companies are experimenting with large dividends while others are trying new models, like foreign asset income trusts, in hopes of attracting attention from investors hungry for yield-based companies.

The current reality for small energy companies, which face tremendous costs for drilling new-style wells, is even renewing calls for Ottawa to partly revive the energy trust model, lest more companies find they can only get enough money if they turn to foreign acquirers.

Since "the trust taxation rules came into effect, equity availability to companies in Calgary has been reduced significantly," said Scott Saxberg, chief executive of Crescent Point Energy Corp. He pointed to Progress Energy Resources Corp., which is in the midst of attempting to gain approval for a takeover from Malaysian giant Petronas. In part, deals like that have come as companies find they don't have other options, he said.

"We've had to seek foreign investors now, a good portion of those being sovereign entities, to develop the resources we have. So it begs the question of should we be looking at trying to improve the attractiveness of dividend-paying corporations in Canada to attract more capital into the market to develop these assets?"

For Renegade, the move to paying a hefty dividend comes amid a sweeping transaction that involves an all-share takeover of Canadian Phoenix Resources Corp., a $70.7-million bought-deal financing, a $114.3-million private placement related to the Canadian Phoenix deal and the $405-million purchase of energy assets from an unnamed "Canadian senior producer," although analysts assume it came from Penn West Petroleum Ltd.

When the dust settles, Renegade will produce roughly 8,000 barrels a day – 95 per cent of them valuable light oil – and estimates it will have a market cap of $476-million plus $244-million in net debt. That nearly doubles the size of the company, which had expected to produce 4,400 barrels a day this year.

An official with Renegade declined comment Tuesday, and trading in company shares was halted the entire day by the Investment Industry Regulatory Organization of Canada, which said it was "at the request of the company pending news."

Renegade had seen strong growth, with production rising 84 per cent per share since 2009. But after peaking at nearly $5, its shares have substantially decreased since then, sitting at $2.43 on Tuesday.

Mr. Nuttall said that kind of performance has made it clear that simply producing more barrels, even if they are profitable, is a tough strategy. "People have been looking for yield," he said. "The typical growth investor is non-existent, and you've had a total abandonment on the part of U.S. and European investors."

Markets are expected to have their first opportunity to react to the deal Wednesday morning. But what Renegade has done is "going to give strong arguments for other boards to consider a similar strategy. The market's not going to pay for growth. If your company is growing at 10 to 15 per cent, and the stocks don't move. If companies adopt a 7 to 10 per cent yield plus a 2 to 4 or 5 per cent growth rate, it might reinvigorate the space."

Crescent Point, which offers a 6.6 per cent yield, has long pursued a similar strategy. But Mr. Saxberg said government action is needed to keep money flowing into a sector sustained by capital. He has in the past recommended a "pseudo-trust dividend model" where the government would allow dividend-paying corporations to write off a portion of their dividend against their income.

Reviving trusts in some form creates "more of an attraction to for the investor" which will mean "there will be more available equity in the markets."