Perpetual Energy Inc (TSX: PMT, OTC: PMGYF) is cutting its dividend in half, to CAD0.015 per share per month, starting with the Jun. 15 payment. The primary reason is a planned ramping up of full-year capital expenditures to CAD135 million, up from a previously planned CAD90 million.

That funding–plus proceeds from the sale of CAD22.5 million of non-core assets this year–will go to develop several oil and gas liquids rich properties that have recently tested extremely positively. Management’s goal is to bring liquids up to 12.5 percent of total output, lessening what’s now an almost complete dependence on the slumping North American dry gas market.

The primary reasons for the move to liquids are obvious in Perpetual’s first-quarter 2011 results. Overall production volume dropped 6 percent drop (8 percent less gas), due primarily to asset sales. But a 56 percent drop in realized selling prices for natural gas during the quarter–as hedge positions came off–triggered a drop in funds flow from operations to CAD0.16 a share, versus CAD0.66 a year ago.

The lower tally was still enough to cover the dividend by a 1.78-to-1 margin. But at current natural gas prices, it left little room for the company to maintain output, let alone shift production to a greater reliance on liquids. With the lower payout, Perpetual does have enough to follow through with its plans, even if natural gas prices at the AECO hub average just CAD3 per gigajoule (roughly the same gauge as per million British thermal units).

The company also continues to provide in-depth guidance under different price scenarios that have proven roughly accurate. None of that, of course, mitigates the extreme sensitivity of company earnings to changes in natural gas prices. In fact, even if the company is successful migrating more of its activity to liquids production gas prices will remain paramount in determining cash flow–and thereby dividend policy.

Leverage to gas has been a very definite negative for Perpetual, formerly Paramount Energy Trust, in recent years. And as I pointed out in the May High Yield of the Month, no one should own Perpetual unless they’re willing to be very patient on this long-term speculative bet on natural gas prices. I’m willing to do that in the CE Aggressive Holdings precisely because Perpetual is just one of several stocks, none of which have anything close to its degree of exposure.

This is no investment for income seekers. But management continues to prove it can survive the worst possible circumstances in its industry. And when this market does finally turn, it will boost the dividend as fast as it has cut when prices have fallen. That points to a huge recovery in the stock eventually.

But Perpetual Energy is only a buy up to USD5 for those willing to take the risk of, yes, even another dividend cut before that happens. The current yield is about 5 percent taking the cut into account.