Abu Dhabi Energy Buys PrimeWest

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 (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.

Comments

[Greg Pinelli:]

All one had to do was read the various Message Boards the last few months to know Canadian Trusts (especially oil/gas) were great buys. The various derogatory and profane comments on performance bore NO relationship to the underlying assets..dividend stream..or potential. Some of these trusts (like PWE..ERF..PWI) have MILLIONS of acres of leasehold property that haven't been developed.
I have a feeling that consolidation and takeover are going to be very profitable strategies for investors to consider.

2007 Sep 25 10:07 AM

[jpmist:]

I find it ironic that PWI is now back up to where it traded before the Canadian Prime Minister decided to wipe out the Royalty tax advantage it had. So in that regard, the Arabs aren't really paying a premium at all.

In return for a bit more in taxes down the road, the Canadian government managed to mark down the asset value of all their Oil and Gas trusts. Doesn't seem too smart to me. . .

2007 Sep 25 10:56 AM

[jpmist:]

I find it ironic that PWI is now back up to where it traded before the Canadian Prime Minister decided to wipe out the Royalty tax advantage it had. So in that regard, the Arabs aren't really paying a premium at all.

In return for a bit more in taxes down the road, the Canadian government managed to mark down the asset value of all their Oil and Gas trusts. Doesn't seem too smart to me. . .

2007 Sep 25 10:56 AM