I don't write much about dividend stocks on this blog, tending to focus more on highly speculative companies. But I think with Eagle Energy that an argument can be made that, in spite of the dividend, EGL.TO ( EGRGF OTC) is still extremely speculative in spite of its monthly distributions.
I have had this stock on my radar for a number of weeks and just initiated a position on Monday Jan. 16th 2017. As such the views I am about to express should be considered as biased. I'm not going to do any brainless pumping however, regular readers already know that's not my style. I don't gloss over the risks, rather I prefer to stress them.
Calculating the annual yield of a dividend paying stock is pretty simple for those unfamiliar. Take the dividend and calculate what it comes to over 12 months. EGL pays its dividends monthly and are currently .005 cents, so over 12 months that comes to 6 pennies. Then divide the annual dividend by the share price and you have the annual yield.
An annual dividend of .06 cents divided by $0.76 cents per share CDN, (the closing price on Monday January 16th 2017) gives Eagle Energy an annual yield of 7.8%, At 75 cents the yield is a nice round 8%. That's probably just a tiny bit (sic) better than anything the banks are paying.
Comparing Eagle's distribution to other oil and gas companies is interesting. Major players like Chevron and Exxon pay less than 4%, even Royal Dutch Shell is less than 7%:
So what are the risks here then? Where do I begin?
A good start would probably be with the dividend itself. Many investors like dividend stocks because you are paid to own them with regular distributions. However dividends can be reduced or eliminated altogether, and when that happens the effect on the share price can be devastating. It already happened with EGL back in June.
On June 6th 2016 the company announced it was cutting its dividend in half, from .01 cent to .005 and the impact can be seen in the PPS. After trading up near $0.90 CDN in May of 2016 the share price collapsed in the wake of the dividend cut, bottoming out around 62.5 cents in early August. That's a drop of around 30%. Here's the chart:
So someone who bought 10,000 shares at 90 cents (to keep the math simple) for a $9,000 outlay saw the value of those 10,000 shares drop to a little above $6,000 within just a couple months. It will take a long time for someone to recover those losses even if EGL continues paying an 8% annual dividend at the current share price. And if Eagle were to eliminate their dividend altogether at some point in the future I think the effect on the PPS would be even worse than a 30% drop.
In the near to medium term I consider this to be the biggest risk.
The other major risk factor I will highlight is the fact that the company is not currently profitable, the only reason they are able to pay dividends at all is because of their credit facility. Anyone considering an investment in Eagle, I would strongly advise reading over their financial statements on SEDAR.
So why, given those obvious risks.....why did I decide to put money at risk with an investment in EGL? Firstly I consider the fundamental realities to be old information that is already baked into the current valuation. What matters more is what is coming in the months ahead, not so much what happened in the recent and more distant past.
The chart above shows that the PPS recovered nicely after dropping close to 60 cents by August in the wake of the dividend cut and is now trading over both the 50 and 200 day moving averages. There is also the bullish cross of the 50 DMA over the 200, however it should be noted that some followers of Technical Analysis consider that cross to only be bullish when both the 50 and 200 lines are ascending.
Crude oil prices have recovered to over $50 USD per barrel as we embark on the year 2017,after starting 2016 around $30. This represents both a risk and a potential reward of course, Should oil prices start falling again, or even if they remain close to current levels and don't continue climbing then I expect small companies like Eagle to struggle and even possibly fail
Some other aspects I look at are also positive, the share count sits at just under 42.5 million, same as where its been since January of 2016 so the company hasn't flooding the market with shares. Short interest is practically non-existent at just 200 shares current up to December 31st of 2016.
And finally I don't see any Promotion, no email blasting chop shops or newsletter services calling the herd to the trough. In terms of news there's very little, beyond monthly dividend announcements and notifications of required flings. And given the minimal news and lack of promotion it goes without saying there's no hype.
Some might suggest that's what I'm trying to do.....that I'm trying to hype EGL. That's not unreasonable, this is a blog about investments after all. But given how pathetic and miserable my little corner of cyberspace is, I consider this post to be little more than a fart in a hurricane.
Good article
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