Penn West Cuts Distribution, But Does Management Have Any Credibility?

Bill Andrew was on BNN a few days ago day and Kurt Wollff reported:

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.

They just had a presentation by the VP Murray Nunns on March 11th at the Canadian Energy Conference. Nunns was touting the stability of the distribution and how the trust was geared to the current energy price decks. He also discussed the flexibility they have under their current credit agreements.

Nunns pointed out as of March 11th their Payout Ratio (POR) was 60%. The price deck in crude was substantially lower then.

You can listen to Nunns' presentation here.

After the cut. I have their POR at 38%. One would think this was sustainable. However, the management appears to have credibility issues.

Disclosure: none

Comments

[notsosmart:]

who doesnt have credibility issues? no one tells the truth.all have an agenda.can you believe anybody about anything?ethics,honesty & transparency are gone for good.lying,greed & the bottom line is the name of the game.you can pass all the regs & laws you want but it wont help.its a society on a downhill slide.sad.

Mar 29 11:32 AM

[thor_92108:]

obviously they are not weaving ANY GARMENTS OF INVISISBLE TRUST AS WOULD BERKSHIRE DO,,,HOPEFULLY THEY WILL LEARN FROM THEIR lack of credibility and ethically challenged ways!
Me thinks they are reconsidering cuts by other Canadian Oil Trusts such as PVX and want to follow their example.....yes but what motive?
Greed me thinks!

Mar 29 12:28 PM

[a. palmer jr.:]

I wonder if they will ever bring the dividends back to where they were if the oil prices rise. Oil prices HAVE risen slightly these past few weeks but they are still cutting dividends. I see a little crookedness here. I thought these trusts were required to pay out their profits mostly in dividends to remain a trust for tax purposes. Of course they could always buy new office furniture and other things weekly to avoid paying dividends to the investors who bought their shares honestly thinking that the company was operating honestly too. In the world of investing, of which I am a very small part, it seems you don't have to go very far to spot a rat.

Mar 29 02:09 PM

[TulipsAllOv...:]

I thought part of the rationale for the dividend cut was to free up cash flow to pay down debt. Isn't that a good use of cash if you're a long-term holder?

Mar 29 02:43 PM

[ksmithdc:]

Interesting read, thanks.

Mar 29 02:45 PM

[toomuchgas:]

What is scary about the trusts is that a few years ago when oil was $45 they had no trouble making much higher distributions. With the trust tax on the horizon I see no reason to invest in these. Better to go with a LP or major like BP with a big dividend.

Mar 29 02:47 PM

[Steve Ward:]

PWE has a NAV of 25.00 a share according to Kurt Wolff. At this juncture it does not take an inside guy to figure out what is going on: a scenario where the long suffering shareholder, tired of dividend cuts and unit price slides, throws in the towel, Nunns and company buy up the cheap priced shares as much as possible and then sell to CNR, another Nunns company at or probably below the $25.00 US NAV, still pocketing a nice windfall in profits.
Who are the unit holders most likely to sell? US investors. With a rising witholding comming on the Canadian side and a lower distribution and a tax hike from Obama, the US investor is the sucker of the year award here.
One last distribution cut should do the job for Nunns and company along with a declaration of turning PWE into an explorco and not maintaining a trust.
One final interesting clue: PWE is in the real estate business as an earlier SA article revealed. PWE has rented and long term leased space in a new construction project. The leased space exceeds by 600 thousand square feet the space PWE needs for its bloated 600 person staff.
Anyone see a new CNR headquarters in the offing here?
Just another conspiracy theory of course.

Mar 29 05:31 PM

[January Thaw:]

In my hunble opinion, I think PWE is one of the most undervalued
stock in the oil patch. Guess I just like living in reality...and everything they have said coincides with what I know is true. Yes, I think they have credibility...and if they don't then it really points out to me what is wrong with this market.

Mar 29 06:29 PM

[Hendrick3:]

PWE management caught me off guard as well but their explanations focus on the rapid deterioration in the natural gas markets which seems to be depressed relative to oil. I think they are about 40% natural gas in terms of production and recent prices have come down significantly (3.63). They rearranged their hedges to give them $6.50 per mcf minimum until October 2010. They are merely staying conservative so as not to find themselves in trouble if natural gas stays down at these levels for an extended period. No sense being a hero with the distributions and then see the company in distress in 2 years. They can always increase distributions if things turn around. I agree with the other poster that this is a grossly undervalued trust. I bought a significant number of units on Friday with the pullback.

Mar 29 08:04 PM

[erewhonman:]

Distribution policy is the same until BoD decides to change it. Then they announce the change. It seems sleezy reiterating distribution policy just before you change it, but it may not be sleezy. Beyond that, there may be good policy reasons to reduce the distribution. With the radically reduced land and production prices this is a time to go hunting. It takes money to buy companies and production. Short term it may seem to hurt unit holders, long term it may deliver a bonanza. Now (as opposed to last July) is a time to buy!

Mar 29 10:20 PM

[Brent C.:]

PWT just bought Reece Energy. Each share of Reece (RXR) is to be exchanged for .125 a share of PWT. At the time the deal was announced RXR shares were trading at about .90 and PWT were trading at 10.00. The transaction is dependant on a vote by shareholders of RXR in April. Is it possible PWT wants to keep their share price down so they don't give to much value to RXR shareholders?


On Mar 29 10:20 PM erewhonman wrote:

> Distribution policy is the same until BoD decides to change it. Then
> they announce the change. It seems sleezy reiterating distribution
> policy just before you change it, but it may not be sleezy. Beyond
> that, there may be good policy reasons to reduce the distribution.
> With the radically reduced land and production prices this is a time
> to go hunting. It takes money to buy companies and production. Short
> term it may seem to hurt unit holders, long term it may deliver a
> bonanza. Now (as opposed to last July) is a time to buy!

Mar 29 10:45 PM

[einstein p ...:]

So many conspiracy theories and a low stock price to boot. I bought more today in the low 9s. Risk reward too good to pass up.

Mar 30 07:16 PM

[Conan the B...:]

PWE is a great company, with excellent prospects.

Management has been abysmally poor for years.

Hold if you have it, otherwise, it should be bought just on its own merits, not on what management does or doesn't do. IMO

Mar 31 03:32 PM

[st57:]

User 213076,
Murray Nunns has nothing to do with CNR. Are you thinking of Murray Edwards? Edwards is heavily involved with CNR and used to be with Penn West but isn't anymore.

On Mar 29 05:31 PM User 213076 wrote:

> PWE has a NAV of 25.00 a share according to Kurt Wolff. At this juncture
> it does not take an inside guy to figure out what is going on: a
> scenario where the long suffering shareholder, tired of dividend
> cuts and unit price slides, throws in the towel, Nunns and company
> buy up the cheap priced shares as much as possible and then sell
> to CNR, another Nunns company at or probably below the $25.00 US
> NAV, still pocketing a nice windfall in profits.
> Who are the unit holders most likely to sell? US investors. With
> a rising witholding comming on the Canadian side and a lower distribution
> and a tax hike from Obama, the US investor is the sucker of the year
> award here.
> One last distribution cut should do the job for Nunns and company
> along with a declaration of turning PWE into an explorco and not
> maintaining a trust.
> One final interesting clue: PWE is in the real estate business as
> an earlier SA article revealed. PWE has rented and long term leased
> space in a new construction project. The leased space exceeds by
> 600 thousand square feet the space PWE needs for its bloated 600
> person staff.
> Anyone see a new CNR headquarters in the offing here?
> Just another conspiracy theory of course.

Apr 01 12:28 PM

[Conan the B...:]

Nowadays, everything is linked to some conspiracy or manipulative act.

If it goes up, no problem. If it goes down, Conspiracy!

Apr 05 12:51 PM