Estimated Net Present Value (NPV) of $25 a share is about 150% higher than stock price for moderately high-debt, hold-rated Penn West Energy Trust (PWE). Released late the night of February 18, fourth quarter results displayed lower unlevered cash flow (Ebitda) driven by crude oil and natural gas prices.
Responding to an investor question on the call today about whether the monthly distribution of C$0.23 could be sustained at lower price, Chairman Bill Andrew was quick to reemphasize that the indicated income level is matched to an oil price of US$45 a barrel. Mr. Andrew said the distribution would still be positive at a hypothetical lasting price of $35. Interest costs magnify the sensitivity of distribution to price just as debt magnifies the sensitivity of NPV to oil price. Those concerns are moderated by hedges that assure an oil price of US$80 a barrel in 2009 for about 30% of oil production.
Our valuation capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil taking account of final reported reserves for 2008. Latest calculations result in NPV concentrated 30% on natural gas and 70% on oil. Pointing to expected oil price recovery, futures prices for the next six years averaged US$62 a barrel recently.
Originally published on February 19, 2009.