Where Is Penn West Energy Trust Going? 16 comments
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On Friday, Dec. 4, while the Dow gained 259 points for a 3% rise, Penn West Energy Trust (PWE) dropped 7.25%, closing at $10.49, and hitting a 52 week low of $9.97 on the day. Investors on both sides of the border are now either:
a) puzzled and confused
b) angry
c) scared
d) elated by high yield
e) thinking of averaging down
or
f) all of the above. (My own guess is that “f” might prevail.)
Obviously, a 30% yield cannot be sustained. The truism “If it looks too good to be true, it probably is” certainly comes to mind. This might be a good time for some review, and readers are encouraged to participate with their own findings. This is what we have found thus far (all dollars are CAD in millions):
- It appears that Canada’s announcement of the SIFT (Specified Investment Flow-Through) legislation on June 22, 2007, had a great impact on the valuation of PWE compared to its industry yardstick, the USO. For the first half of 2007, PWE outperformed the USO. After SIFT was announced, PWE dropped below, with that gap widening as the credit crunch took hold of economies world-wide.
- Appearance of PWE’s 3rd Quarterly Report, for nine months ending September 2008, seems to have created another slide steeper that the USO downtrend. In spite of the highly publicized acquisitions of Canetic and Vault, PWE had to reduce its previous guidance for 2008 of 195,000 boe per day downward an unspecified amount. Combine this with dropping oil prices and you have a recipe for reduced dividends.
- Close reading of this 3rd Qtr report discloses that the Canetic and Vault acquisitions did not create any expected economies of scale. Compare 9 months ended September 2007 with 9 months ended September 2008: the G and A expenses rose from $51 to $110. That is an increase of 115%. Even if you back out management compensation of Unit Trust Right awards charged to G and A ($25 in 2008 and $11 in 2007), there is still an increase of 112%. Management needs to do a better job of explaining this.
- On page 26 of the 2008 Quarterly Report received by US shareholders (Canadians seem to have received a different report, and identical comparisons have not been possible), Office Leases are a line item under Contractual Obligations and Commitments. This expense grows from $6 in 2008; $28 in ’09; $48 in ’10; $64 in ’11; $61 in ’12 (a thankful drop); and total $673 thereafter - though it is promised these will be reduced by $388 in future sub-lease recoveries.
It appears that PWE is no longer just an oil-producing revenue trust - - - it has taken a major leap into real-estate!
And this may have something to do with the weakness in PWE share price. Here are excerpts from a Calgary Herald article dated May 31, 2008:
By Mario Toneguzzi, Calgary Herald
It's being described as one of the most significant office lease deals in Calgary's downtown commercial real estate market.
Two new office towers -- initially called the Homburg-Harris Centre at 9th Avenue S.W. and 1st Street S.W. across the street from the Palliser Hotel -- have been 100 per cent leased by Penn West Energy Trust.
The site, encompassing both towers, has also been renamed the Penn West Plaza. "This is extremely significant," said Keith Rockley, vice-president of human resources and corporate resources for Penn West. Rockley said the company's growth was part of the reason for the move.
In November, Penn West Energy Trust, the country's largest conventional oil and natural gas trust, acquired Canetic Resources Trust for $3.6 billion.
Penn West's relocation began Friday as the company moved into two floors of the east tower, said Shauna McIntosh, manager of corporate resources for Penn West. The entire east tower -- 10 floors -- will be occupied by the end of June, she said. The ground floor of the building will be reserved for retail shops. The second floor is Penn West space with some common area shared with the Plus-15.
The company's main reception area will be on the second floor. Floors three to 10 will be 100 per cent occupied by Penn West. The east tower is about 220,000 square feet and the building will house about 660 people. Penn West also has entirely leased the west tower comprising almost 400,000 square feet and 20 floors. It will be ready for occupancy by late 2009 or early 2010.
The company currently occupies 18 floors, nearly 200,000 square feet, in Bow Valley Square for about 600 staff. It also has five floors and about 110,000 square feet in Fifth Avenue Place.
Rockley said Penn West may sublet some of the west tower if the company doesn't require all the space but that decision won't be made for at least two years. The total square footage of 600,000 in the two new towers is more space than the company currently has in downtown Calgary. "That number factors in some growth. We will review our growth strategy in approximately a year's time and at that time decide whether to sublet some of that space or not, depending on the growth in the next year," said McIntosh.
Those closing words by McIntosh are not conducive to building confidence that “economies of scale” is a relevant term for either PWE management or its Board of Directors. Investors might be forgiven for harboring doubt about future prospects, particularly if they felt they had invested in a “Canroy”.
On the positive side, some facts do remain that could be heartening:
- Thompson Reuters has listed PWE as “outperform” (dated 12/04/08).
- Recently two analysts posted C$25 and C$22.50 as target price for PWT. Given an 18% discount, this would price PWE at $18 to $16.20 in US dollars - well above latest close of $10.49.
- November dividend, payable Dec 15, is C$0.34, or $0.28 US. At current price, this amounts to an annual yield of 32%. If the divvy were cut in half, down to $0.14/month US, on an annual basis the yield would still be 16% on a share price of $10.49.
As an investor, my skepticism has not been erased.I am inclined to watch, and in President Reagan’s words, “trust, but verify”.
The annual report and 10-K will be required reading, and I hope management and the Board will speak to the issue of “economies of scale” by projecting decreases in staffing, G and A, leasehold expenses, and also establish tighter controls over their own Unit Trust Awards.
There may be moments in time when averaging down could be a prudent move. However, it would be best to wait until share price is well inside the Entry Zone - and the Entry Zone has leveled back to horizontal. Meanwhile, current shareholders should sit back and enjoy not only the dividends, but the fact that you are now a bona fide real estate investor. Newcomers seeking high yields might want to heed another Latin advisory: “caveat emptor”.
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This article has 16 comments:
So consolidation will be the rule of the day and all it takes is one of them to move on the Canroys and they will all fall/merge in rapid succession.
The SIFT tax may come about but with Harper soon gone, retirees needing their divs and CN needing oil and gas production/exploration jobs may cause this 2011 to be delayed or repealed to encourage investment. otherwise the u/e in Alberta, with oilsands being put on hold, will be unbearable to a country used to low u/e and no deficits/strong banks.
As painful as it is, anyway you look at it as a long-term investor in Canroys, you will be rewarded.
Long PWE, PVX,PGH,HTE, AAV, OGF.UN-TO, KYE and VIP.UN-TO. the stock drop has been painful but the divs, even if reduced, are incredible. Dollar will reverse soon with all the money the fed is printing and govt is spending and CN$ will rise as well.
On Dec 07 03:37 PM smurphny wrote:
> Caveat Emptor for damned sure. The very existence of the Canadian
> oil trusts is questionable at $20 crude which is a VERY real possibility.
> There may be no money to distribute and no way for the more heavily
> financed trusts to pay their note holders when crude becomes priced
> less than the cost to extract it. U.S. oil and gas trusts, with no
> debt are better energy bets right now because they will at least
> avoid bankruptcy while supplying a necessary commodity at reduced
> levels. Some of the CANROYS will probably be ok because they have
> small amounts of debt but others like HTE may be in trouble should
> the likely scenario of a depression continue to unfold. Averaging
> down to a final price of 0 IS NOT a good idea. "Cheap" at $5 does
> not look like cheap when it falls to $2.50 and the distribution is
> little help. Trade these things right now without regard for distributions
> because getting fixated on them can cost you much more than you will
> ever make back in distributions.
1. Lack of liquidity taketh away..and 10 trillion in new liquidity giveth back...the fall in oil prices would be far more devastating if it were supply driven..the same for nat gas to a lesser degree. Oil is NOT in greater supply..in fact, it's in startlingly LESS product supply going forward. The OVERWHELMING trend is for marginal pressure beyond 85 million barrels of equivalent to increase. Liquidity will bring demand..NOTHING IS IN PLACE TO EVEN SUSTAIN SUPPLY LET ALONE INCREASE IT...
2. The last few months have lessened the focus on safe have oil/gas assets..don't kid yourselves..the world is not a less dangerous place..and the lack of financial backing has stopped infrastructure buildout dead in its tracks...that means supply threats..political and military will have an exponential effect on supply problems. Canadian and US product will command VERY premiums into the distant future...not months, but years.
3. Coal and shale/sand oil are on the political outs....that leaves nat gas to pick of the electrical burden and conventional oil competing against itself...environmental... north and south of Canadian border are going to klll climate destructive and water destructive product..PERIOD.
PWE..ERF..LINE..LGCY in Canada and the US have time on their sides...The markets will start reliquifying MUCH faster than anticipated....Price is on an unavoidable collision course with Peak Oil and nat gas..as well as Peak Safety for each.
I've owned PWE since it listed on the NYSE with its takeover of Petrofund, received more shares when it swallowed Canetic.
Its had to either sell an asset or long term debt to maintain its dividend a number of times. With current conditions, a major cut will be in the offing since they will not be able to raise the money to pay the dividend again.
My guesstimate is a reduction of more than 50%.
IMHO
Geo has been pushing this particular CanRoy since at least the $30 area, He is extremely biased towards it, just as I'm extremely biased against present management. I have no problem with the assets that I know of. I do however hate mismanagement and the deliberate asset nondisclosure.
My hope has been that a particularly bad quarter will cause management to be ousted.
Besides, the article seems to attribute the share price drop as due to "rational" selloff as opposed to investor paniic or short covering. If rational selling were the case, what NEW announcement on the day the of selloff can we attribute the price drop to?
Seems to me even if PWE is to reduce dividends due to further drop of oil price, we would still get 16% instead of 30+%. A SUSTAINED drop (years, not months) of oil price below production cost is highly unlikely. The more important question is which companies are left standing when the market recovers. With the weaker ones gone, the stronger ones will have more pricing power.