TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

Pine Cliff Energy’s (PIFYF) combination of a high dividend yield and a monthly dividend make it appealing to individual investors.

But there’s more to the company than just these factors. 

Business Overview

Pine Cliff Energy engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the Western Canadian Sedimentary Basin. The company primarily holds interest in oil and gas properties in the Southern Alberta, Southern Saskatchewan, and Edson areas, as well as in the Viking and Ghost Pine area of Central Alberta. The company was formed in 2004 and is headquartered in Calgary, Canada.

As an oil and gas producer, Pine Cliff Energy is highly cyclical due to the dramatic swings of the prices of oil and gas. Notably, the company has reported losses in 7 of the last 10 years and initiated a dividend only in 2022.

On the other hand, Pine Cliff Energy has some advantages when compared to the well-known oil and gas producers. First of all, the company has a strong balance sheet, which is paramount in this business, as it enables the company to endure the boom-and-bust cycles of the oil and gas industry.

Source: Investor Presentation

In addition, the management team of Pine Cliff Energy owns 11% of the company and hence it is aligned with the shareholders. This is an important characteristic, which should not be undermined by investors.

Moreover, Pine Cliff Energy has the lowest natural production decline rate among all Canadian public producers. This reduces the amount of capital expenses required to sustain a given level of production.

Just like almost all the oil and gas producers, Pine Cliff Energy incurred losses in 2020 due to the collapse of the prices of oil and gas caused by the coronavirus crisis. However, thanks to the massive distribution of vaccines worldwide, global demand for oil and gas recovered in 2021 and thus the company became profitable in that year.

Even better for Pine Cliff Energy, the Ukrainian crisis triggered a rally of the prices of oil and gas to 13-year highs last year. As a result, the company posted 10-year high earnings per share of $0.22 last year. It also initiated a dividend in June of 2022, after more than a decade without a dividend.

Growth Prospects

As mentioned above, Pine Cliff Energy has the lowest natural production decline rate among all Canadian public producers.

Source: Investor Presentation

The natural decline of the producing wells is paramount in the oil and gas industry, as high decline rates result in excessive capital expenses required to sustain a given level of production. It is thus evident that Pine Cliff Energy has a significant competitive advantage when compared to its peers.

On the other hand, as an oil and gas producer, Pine Cliff Energy is highly sensitive to the inevitable cycles of the prices of oil and gas. More precisely, as the company produces more gas than oil, it is especially sensitive to the cycles of the price of natural gas.

Thanks to the rally of the prices of oil and gas to 13-year highs last year, Pine Cliff Energy posted 10-year high earnings per share in 2022. However, both prices have plunged more than 50% off their highs in 2022. As a result, the company is likely to post much lower earnings per share this year.

Given the highly cyclical nature of the oil and gas industry and the high comparison base formed by the 10-year high earnings per share last year, we expect the earnings per share of Pine Cliff Energy to decline by about 20.0% per year on average over the next five years, from $0.22 in 2022 to $0.07 in 2027.

Dividend & Valuation Analysis

Pine Cliff Energy is currently offering an above average dividend yield of 8.9%. It is thus an interesting candidate for income-oriented investors, but those investors should be aware that the dividend is far from safe due to the dramatic cycles of the prices of oil and gas.

Pine Cliff Energy has a payout ratio of only 36% while it also has a strong balance sheet, with net debt of only $118 million. As this amount is only 38% of the market capitalization of the stock, it is certainly manageable.

However, it is critical to note that Pine Cliff Energy initiated a dividend only in 2022, amid multi-year high commodity prices. It failed to offer a dividend in the preceding years, as it incurred material losses in most of those years. Therefore, it is evident that the dividend of the company is far from safe.

In reference to the valuation, Pine Cliff Energy is currently trading for only 4.1 times its earnings per share in the last 12 months. Given the high cyclicality of the company, we assume a fair price-to-earnings ratio of 10.0 for the stock. Therefore, the current earnings multiple is much lower than our assumed fair price-to-earnings ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 19.6% annualized gain in its returns. However, this gain will be offset by our expected -20% annual decline of earnings per share over the next five years.

Taking into account the -20% annual decline of earnings per share, the 8.9% current dividend yield and a 19.6% annualized expansion of valuation level, Pine Cliff Energy could offer just a 0.8% average annual total return over the next five years. This is a low expected return, which results from the fact that we have just passed the peak of the oil and gas industry. The stock is highly risky right now and hence investors should wait for the next downturn of the energy sector before evaluating the stock again.

Final Thoughts

Pine Cliff Energy is thriving right now thanks to the above average prices of oil and gas. The stock is offering an exceptionally high dividend yield of 8.9%, with a payout ratio of only 36%, while it has a strong balance sheet. As a result, it is likely to entice many income-oriented investors.

However, the company has proved highly vulnerable to the cycles of the prices of oil and gas. As these prices seem to have entered a downcycle, the stock is highly risky right now. Therefore, investors should wait for a much lower entry point.

Moreover, Pine Cliff Energy is characterized by extremely low trading volume. This means that it is hard to establish or sell a large position in this stock.

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