Eye on PrimeWest Energy Trust

The PrimeWest Energy Trust (PWI) is a Canadian oil and gas trust which is actively managed to generate monthly cash distributions for unit holders. The Trust’s operations are focused in western Canada, Montana, North Dakota, and Wyoming. The trust produces approximately 68% natural gas and 32% crude oil.

Through the distribution of monthly dividends, PrimeWest has a yield of about 13.5%. PWI’s stock is trading near a 52-week low and is over 45% below its 52-week high of $32.90. I believe that PWI has a compelling valuation at this level and that PWI’s share price should move up while investors also capitalize on the hefty dividend.

Although all oil and gas trusts have performed poorly as the price of oil and natural gas has declined, Canadian oil and gas trusts have been decimated in the last five months. In October of 2006, the Canadian Minister of Finance announced a proposal that will increase taxes on Canadian oil and gas trusts. Starting in 2011, Canadian oil and gas trusts will be taxed at the same rate as regular Canadian corporations. These taxes will significantly decrease the amount of profit that will be distributed to unit holders of Canadian trusts.

However, this proposal was unpopular with conservative Canadian politicians and the deadline is still four years away. It is possible that the political landscape in Canada could change significantly in four years which could serve to reduce or eliminate the newly proposed taxes for oil and gas trusts.

Assuming that the new taxes actually go into effect in 2011, PrimeWest still has a compelling valuation under $19. For the past five months PrimeWest and other Canadian trusts have declined much faster than the underlying energy prices which drive their profits. PrimeWest is down about 35% since September of 2006. During that same time frame the price of crude oil dropped from about $65 a barrel, to the current price of about $52 a barrel (25% decrease) and natural gas prices were roughly flat.

PrimeWest has an excellent track record of boosting revenues, reducing costs, and increasing reserves. For the past five years average daily production of natural gas has grown every year. The natural gas production increases are impressive, but more importantly natural gas reserves have grown in each of the last five years as well. The estimated reserve life for PWI has grown from 10 years in 2001, to a current estimate of over 13 years. Since PrimeWest is actively drilling and expanding their proven reserves, they are in essence a similar investment to an integrated oil company, but PWI pays a much higher dividend.

It is impressive that PrimeWest is able to increase production, increase reserves, and still pay a consistent dividend over 10%. Although most of the Canadian oil and gas trusts appear to be good values at this point, PrimeWest is the highest quality investment in this sector due to their track record and the growing life expectancy of their reserves.

PrimeWest is great addition to any long term portfolio because it gives protection against a jump in energy prices. If energy prices decline, then investors have what amounts to a 13% per year cushion against a potential decline in the share price of PWI. If energy prices spike again, PWI shares should soar. Although energy prices have moderated in recent months, demand for oil and natural gas continues to grow.

In September of 2006 China’s oil imports were 24% higher than they were in September of 2005. China’s economy is showing no signs of slowing down and China’s demand for oil will continue to grow for the foreseeable future. Therefore, I believe that every long term portfolio should have at least some exposure to energy related investments.

The combination of the decline in oil prices and the proposed change in Canadian tax laws have made Canadian oil and gas trusts an unpopular investment right now, but I believe that these to factors have combined to create an excellent buying opportunity for the long term investor.

PWI 1-yr chart

Disclosure: Author is long PWI.

Comments

[cjmayoh:]

Good article. I agree it is an excellent time to get in.

2007 Feb 12 09:45 AM

[Saul Sterman:]

see www.cbo.gov/showdoc.cf...;sequence=2

Correct version...

" 1. That a Distribution Tax (at a rate of 21% for 2007, 20.5% for 2008, 20% for 2009, 19% for 2010 and 18.5% for the 2011 and subsequent calendar years, plus 13% on account of provincial income tax for each of those calendar years, prorated for taxation years that include days in more than one of those calendar years) apply to certain distributions from publicly-traded trusts (other than real estate investment trusts) and publicly-traded partnerships, with effect..."

2007 Feb 14 08:53 AM

[Greg Pinelli:]

Primewest..Shiningbank... ..all very solid quality were hit very hard in November. Primewest, in particular, has increased its production capacity significantly and added oil to its very strong gas reserve base.
In 3-4 yrs an investor at these prices would easily make back most..if not all..of the losses seen already in dividends alone. When..not if..heavy oil becomes one of the few viable options for reserve expansion those companies will desperately need Primewest's gas.....

2007 Feb 16 09:07 PM