Abu Dhabi Energy Buys PrimeWest

Sep.24.07 | About: PrimeWest Energy (PWI)

A couple of months ago, I bought a basket of Canadian energy income trusts. I wrote my reasons for doing so here. It was, and still is, my belief that the valuations of income trusts had become ridiculously cheap - too cheap to pass up.

Obviously, someone else agrees with me. Today, the Abu Dhabi Energy Company offered $5 billion for PrimeWest Energy (NASDAQ:PWI).

Simply put, I estimate that as long as energy prices don't fall too far, reserve lives are eight years, and cuts to dividend payouts are no more than 20%, at current levels, dividends to be paid out equal around 90% of the value of the basket.

Yes, I know the fields are in decline, but there are all sorts of catalysts that can push this group significantly higher. One of them is a take-out by a buyer who also recognizes value, which occurred today.

I believe the income trusts are a prototypical example of Ben Graham's cigar butt analogy, where, like a cigar with one last good puff, a declining business can offer good returns if cheap enough.

I had seven names in my basket of which PrimeWest was one. I decided to leave $0.40 on the table for the risk arbs, and sold the stock. My annualized total return on the name was about 60%. That is at least due partially to luck, for sure, since I had no idea that it would get taken out a few months after I bought it. But value is often found in very cheap stocks that can monetize in unexpected ways.