If you’re a frequent reader of DINKs finance, you know that we own shares in Canadian energy trusts. If you’re following the stock market, you’ll probably know that energy trust shares, and our holdings in Advantage Energy (AAV) in particular, have taken a beating in the past few weeks.
Advantage Energy is a Canadian royalty trust. This means they are in the business of developing oil and natural gas properties, selling the energy and giving the profits to shareholders. By “developing”, I mean they rent or own land in Canada, drill wells and pump out the oil or natural gas. AAV is a relatively new outfit, having been incorporated in 2001. The firms management is mostly a bunch of guys with backgrounds in the oil and natural gas industry in Canada. Its on the smaller side, with about 10 management staff and 135 employees.
So whats the big deal and why are we talking about Advantage? In a word: money. Advantages’ share prices has been under severe pressure and is currently trading at all time lows. Since we DINKs are partial owners of the company we’re naturally interested to see whats going on. Probably you’re interested too, since you’re reading this post.
As near as I can tell, AAVs major problem is debt. Relative to 2006, the company’s bank debt increased by 40%, climbing from 372 to 521 million. For a company that’s worth 1.24 billion on the open market, a debt of 521 million means that for every dollar of assets, the company owes 42 cents. By any reasonable accounting, that’s high. Also, this seems to be impacting AAV’s bottom line – their dividend payout was recently cut by 20% from 15 cents to 12 cents Canadian.
While AAV’s debt is hurting their bottom line, its not whole story. Evidently the debt wasn’t entirely racked up via a series of poor management decisions. Some seems to have been incurred by merging with Sound Energy Trust. The Sound Energy merger cost approximately 17 million AAV shares and 21 million in cash -but it brought along 400,000 acres of undeveloped land. – That’s a little more than half the size of Rhode Island or roughly equivalent to a small mideval kingdom.
Other metrics are okay, but not stellar. For example, their rate of well expiration is fine, production levels are slightly down (1 or 2 % annually) and operating costs have increased marginally from 5,741 to 6,242 thousand. Not great, but certainly not a huge problem. AAV additionally had to take on some high interest convertible debentures (sexy bonds that can convert to stock) to make their merger with Sound Energy happen. This has also dampened the company’s profitability somewhat.
To sum up, AAV is currently saddled with high debt levels. While the Sound Energy merger has increased the asset base of the company, a lot will depend on managements ability to reduce debt and improve operating margins in the near future. At a book value of 10.46 USD per unit, the company appears to be fairly valued – we DINKs are going to hold our 3000 shares.
Happy Investing All!
-James
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