Penn West: Distribution at Risk

Distribution-lovers, beware — Penn West Energy Trust (PWE) may soon bring heartbreak. The company pays C15¢ per unit per month, but it does not look as though it will last.

Penn West’s second quarter press release said the board plans to keep it there until November. But then what?

“The distribution will remain at [C15¢] per unit until November, at which time we believe a 50% reduction will be necessary to allow for a meaningful capital program in 2010,” Kam Sandhar, an analyst at Peters & Co. Ltd. in Calgary, said in a research note Wednesday.

Over at Canaccord Adams, Kyle Preston is also calling for a cut, but not tossing out specifics. “Management is sending a clear message that this distribution will likely be cut in the future as they move towards a more growth oriented business model,” the analyst wrote in a note.

Comments

[a. palmer jr.:]

I hope they're not doing this so they can pay their execs an elaborate bonus, or do they do that in Canada.

Aug 14 08:21 AM

[Mark Divy:]

Purely speculation from the analyst. Even if they double their capital program, the funds flow would easily cover this and the current level of distribution. Div cut would only be based on lower oil/NG prices in the coming months. Current oil price move to upside with pending (hopefully) recovery should assist in funds flow as well.

Aug 14 08:33 AM

[valuatorgirl:]

PWT reported a Q2 loss, and distributions have been reduced significantly already over the past year. Distributions amount to over 12% per year still, but are not secure. Strong company, great oil/gas ratio, not

Aug 14 10:02 AM

[gmwright:]

I agree, even though NG is low, oil has recovered nicely. The funds flow should be more than sufficient. I seem to recall their current dividend was based on $45 price of oil. Surely with recovering economy they can at least maintain the current payout even with the weakness in NG. I think the high yield is more a comment on the cheap price of the stock rather than unsustainable cash flows and fundamentals.


On Aug 14 08:33 AM Mark Divy wrote:

> Purley speculation from the analyst. Even if they double their capital
> program, the funds flow would easily cover this and the current level
> of distribution. Div cut would only be based on lower oil/NG prices
> in the coming months. Current oil price move to upside with pending
> (hopefully) recovery should assist in funds flow as well.

Aug 14 10:20 AM

[jjp:]

I believe that it is about two years off that Canada will pull the plug on the Royal Trusts. (Sorry my old memory is not that good.) They are like MLPs returning the profits to unit holders. At that point they will be like standard stocks that shoot to attract investors for growth in stock value since the stock break of high unit returns will be gone.
Yes, Canada is being very stupid. That is the nature of governments.
I was somewhat stupid when I bought the stock. I had thought it was US because of the name, Penn. DUH!

Aug 14 10:21 AM

[erniem:]

The plug "pulling" is a tax increase that will lower dividends, though PWE has enough writeoffs that it won't matter for a few years after 2011. As far as the dividend cut, the same applies to almost every major energy company, though the current oil and gas prices are healthy enough to sustain, in my opinion.

Aug 14 10:26 AM

[update:]

It is hardly news that Penn West will lower it's dividend. We are entering the two year period of absolute maximum pain in this great depression so naturally oil will plummet along with the rest of the market when the bear market bounce on manipulated short squeezing is concluded.

China is going to implode very badly and this will be part of why oil drops, but at the end of the day it will be the complete lack of a world economy that depresses oil prices from here.

Aug 14 12:33 PM

[bob jacobson:]

How would PWE look as non trust copany? What would be their P/E and dividend rate? Rather than just extracting value from their assets they would need a have a strategy to expect an increase in earnings over the years.

Aug 16 01:11 PM

[User 472805:]

This is speculation by two analysts.
People will still need oil and gas.
It is more cost effective to get them from Canada than the Middle East.
Good Luck.

Aug 17 04:57 PM

[DM32:]

I seem to recall that PWE has always provided guidance on distributions a few months at a time, so I did not read anything unusual into the last announcement. According to the Q2 report from PWE which I received today, distributions as a percent of cash flow from operating acivities for the 3 mo. ending June 30, 2009 were 64% vs 57% during the same period in 2008. This would suggest that the current payout is not unsustainable particularly if commodity prices continue to firm up and/or rise. From Q1 to Q2 crude prices increased from US $43.21 to US $59.62 so they are heading in the right direction. The question is sustainability of the increase in oil prices and that will be a function of the world economy -- and that is anybody's guess given all the government intervention that just serves to cloud the picture. Just based on the fundamentals from Q1 to Q2, I would not be anticipating such a drastic cut in the distribution (50%) but the analysts may have more information from the Company than we do.

Aug 24 02:57 PM

[GigaBill48:]

I believe that with present rate of write-offs the distribution will continue for at least 1st half of next year before shrinking.

Their oil/gas ratio makes my old head just throb...

Sit tight and enjoy the distributions for a bit longer is the way I see it.

Standard disclaimer: Hindsight is always 20/20

Sep 15 02:28 PM