AWE Limited (ASX: AWE) recently announced that they have sold a portion of the Bass Basin project to a Japanese company, Toyota Tsusho, for $80 million, rewarding shareholders with a $5c per share special dividend (3.4% yield based on the recent share price) in the 1st half of 2012.
But is this a good bait to reel investors? Apparently not so much as the share price increased only 4 per cent on the day of announcement, and has since drifted back down to around $1.35, ex the 5 cents dividend.
The reason for doing so, according to Managing Director Bruce Clement, is three-fold. To quote the oil and gas company, "reduce its equity interest in the Bass Basin to manage near term capital requirements, to better balance its asset portfolio, and to free up capital for investment in future growth projects."
I agree that reducing the risk exposure for the capital expenditure requirements needed for the BassGas Mid-Life Enhancement project was a good initiative but I am not so sure if giving dividends at this moment is the right decision. AWE was never previously a fan of distributing regular dividends to their shareholders.
Indeed AWE has a good track record of having a strong balance sheet. A strong balance sheet is essential for exploration and production companies because the risk of every project is high and a good buffer will prevent major setbacks.
On the other hand, sales and earnings have not been going too well. The last time AWE had a great year was 2008, during the boom of the economic cycle. Furthermore, oil and gas companies usually have huge initial cash injections to their projects to hopefully get better returns in future years.
One of Warren Buffett's criteria in his investments is to pick companies with predictable and sustainable earnings. Is this a risk appetite you can handle given the current economic cycle? Please do not stand in AWE for a special dividend, unless you truly understand the oil and gas industry.
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This article was written by Motley Fool contributor Jonathan Lee. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.
