(By Balaseshan) CIBC World Markets Inc. analyst Adam Gill downgraded his rating of Pinecrest Energy Inc. (CVE: PRY) to "sector performer" from "sector outperformer" and cut his price target to $2 from $2.75.
As was announced last week, Pinecrest and Spartan will merge to form a dividend-paying corporation, Gill noted. The company is expected to keep production flat in 2013 and plans to pay an annual dividend of $0.155 per Pinecrest share, or an 8.7 percent yield for the next applicable 12 months (8.0 percent for 2013).
Overall, the analyst believes that the dividend model makes sense in this sideways commodity price environment, but believes that there are a few issues that make Pinecrest's model a little more risky than he would like, notably the very high corporate decline rate.
Based on Gill's estimate, he believes that in order to keep production flat around 9,250 Boe/d, the company will need to invest $165 million (versus management expectations of $130 million), leading to a total payout ratio of 149 percent. This is due to his higher assumed decline and capital efficiency assumptions.
In conjunction with the analyst's higher-than-group average payout ratio and the steep decline, his net asset value decreases. Lower growth is the main driver of his price target reduction.
The brokerage raised its 2012 cash flow per share estimate to $0.33 from $0.32, while lowering its 2013 estimate to $0.32 from $0.39.
PRY is trading down 3.45 percent at $1.68 on Tuesday.