Hold-rated Penn West Energy Trust (NYSE:PWE) offers unlevered appreciation potential of 25% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of US $19 a share. On July 14 we reduced NPV from US$25 to US$23 when we reduced estimated Present Value of North American Natural Gas by 20%. Today we reduce NPV from US$23 to recognize the declining volume trend while the trust paid high distributions.
Meanwhile, oil drives 73% of NPV in our valuation, which capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P). Released today, second quarter results met our estimate for unlevered cash flow (Ebitda) from three months ago, helped by higher oil price. Pointing to possible further gains, oil futures prices for the next six years crossed the 40-week average into an uptrend at the end of May.
There are also prospects for the volume trend to improve with the application of horizontal drilling and multistage fracturing to boost recovery from PWE’s relatively unexploited light oil resource base. After reducing debt, management’s priority is to exploit its assets that have doubled in size with acquisitions in the past two years. Distributions may be reduced in 2010 in favor of the debt and reinvestment priorities.
Originally published on August 12, 2009.