Penn West Transitions to Exploration and Production Company

Hold-rated Penn West Energy Trust (PWE) offers unlevered appreciation potential of 58% to a McDep Ratio of 1.0 and levered appreciation potential of 102% to Net Present Value (NPV) of US$25 a share. During the first quarter, according to results released today, the company generated cash from oil and gas production of about US$12 a barrel of oil equivalent as the difference between price of about US$33 and cash operating costs of about US$21.

Unlevered cash flow (Ebitda) was less than our expectations from three months ago, though hedging helped diminish the impact of low market pricing. Meanwhile, after the reduction in the past month, PWE’s cash distribution is back under 60% of projected Ebitda minus interest. Our valuation capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil.

Pointing to expected oil price recovery, futures prices for the next six years averaged near US$71 a barrel recently. As oil price trends higher, management would likely use the incremental cash flow to reduce debt rather than increase the distribution as PWE undergoes a tax-induced transition from income trust to exploration and production company.

Originally published on May 6, 2009.

Comments

[Marc Courtenay:]

Helpful article Kurt and thanks. What price target do you have for PWE to be at an attractive valuation level? I'm wondering if it is around $13?

Jun 10 02:48 PM

[Steve Ward:]

PWE 's unit holders would be better off if the company reduced its payout to zero and used the funds for reserve purchases and debt reduction. The result will be a price appreciation in the units greter than the current annual yield.

Jun 11 12:20 AM