The units of buy-recommended Penn West Energy Trust (PWE) offer the highest distribution yield at 15.9% and the lowest unlevered cash flow multiple at 5.4 times after declining 16% in stock price during the past four weeks. The unfavorable stock price momentum suggests patience in looking for appreciation.
Though two acquisitions in progress may be in jeopardy as a result of declining stock price, PWE can do well with or without the prospective purchases. A 2009 tax increase to 40% from 25% by the province of Alberta may feel demoralizing now, but would be covered by higher commodity price already in the futures market compared to our valuation.
On a more positive note, the same Finance Minister of Canada who would effectively end income trusts with a tax of about 31% in 2011, has lately been talking of lowering the corporate income tax to 15% at the same time. Meanwhile, PWE’s ratio of distributions to unlevered cash flow (Ebitda), 0.62, leaves a cushion against fluctuations in oil and gas price. Finally, PWE’s cash flow stream concentrated 70% on oil, mostly light, and 30% on natural gas appears attractively priced at a McDep Ratio of 0.83.
Originally published on November 30, 2007.