Provident Energy: No Longer an Income Trust, Still a High Yield Dividend Play

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 |  About: Pembina Pipeline Corp. (PBA)
by: Old Trader

Provident Energy Ltd. was formerly a Canadian oil/gas income trust, until January 1 of this year. Originally, Provident engaged in production of both oil, and NG, and had a smallish mid-market operation that processed NG for the liquids available from "wet" gas. Along with Canadian assets, PVX had some US assets as well.

Leading up to the conversion to a corporation from an income trust, Provident sold and spun off various producing assets to BreitBurn Energy (NASDAQ:BBEP), and in June, 2010, combined remaining producing assets with Midnight Oil Exploration, Ltd., to form Pace Oil & Gas, whose shares were spun off to PVX's shareholders.

What remains is a pure midstream play, consisting of interests in pipelines/transport, storage facilities, and fractionation facilities, primarily located in western Canada, but also with a smaller US presence.

Interestingly, despite the fact that Provident no longer produces oil, its fortunes still remain tied to oil prices. This is because the price of the various natural gas liquids (NGLs) that it produces is based off of the price of oil. These NGLs include ethane, propane, butane and pentane plus. In addition, condensates from NG are used as diluent and mixed heavy oil, or bitumen, allowing it to be transported via pipeline.

Provident operates much as a crude oil refiner would, profiting from the spread between input costs, and the price of higher value output. In the case of Provident, however, the input is nat gas, rather than crude oil, placing it in a "sweet spot", where NG prices are very low, and likely to remain so, while oil prices are still high, despite the recent pullback.

A couple of points of interest to income-oriented investors is the fact that PVX pays a monthly dividend, just as it did as an income trust. There's also been a change in the tax treatment of the dividends, so investors holding shares in an IRA, or other tax-advantaged account no longer lose the 15% tax that has been levied previously.

PVX currently pays .045/month for a yield of 6.21%. As of Friday's close, it was trading 5.8% off of its 52 week high of $9.48. As noted, the biggest risk posed to PVX would be a substantial and sustained pullback in oil prices, and/or a sharp spike upward in NG pricing. Given the rapid expansion of shale gas production, I don't think that's very likely.

Sources: Provident Energy Ltd. company website, Morningstar

Disclosure: I am long PVX, and consider it to be one of my core holdings.