Penn West Energy Trust: An Underappreciated Gem 78 comments
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Penn West (PWE) is North America's largest oil and gas royalty trust, and belongs in a group of Canadian companies ("Canroys") that pay a large percentage of their cash flow in the form of dividends to their "shareholders" (who are actually called unitholders). Although various Canroys are active in different businesses, PWE is an upstream oil and gas company with just a little bit more oil operations than gas.I believe that PWE offers compelling value that is largely UNappreciated by investors.
This opinion is primarily based on my belief that 2-digit oil prices (ie, oil under $100) and single-digit natural gas prices (ie, nat gas under $10/MCF) are largely behind us (I do not mean that oil and gas cannot temporarily go below those thresholds; what I mean is that in my opinion, it is unlikely that going forward, on a quarterly basis, oil will average under $100 or nat gas will average under $10/MCF).
If you do not agree with the above opinion — i.e., if you believe oil is very likely to go substantially under $100 and stay there, or nat gas substantially under $10 and stay there — then PWE may be an OK investment but not much more.
Because the first thing that people notice is the yield, I would like to address it first. The yield is mind-blowing at about 13%. What is even better is that (a) it is paid monthly (a bit over 1% per month), and (b) to the best of my understanding, it qualifies for 15% tax-advantaged treatment (consult with your tax advisor; also note that your broker will deduct 15% from each dividend payment which you should be able to claim as a credit on your US taxes; finally, if Democrats win the White House this year, this tax advantage may disappear).
A question that must ALWAYS be asked about a company's dividend—especially when the yield is 13%--is whether it is likely to be sustainable because the cutting of a Canroy's dividend usually kills the stock price. PWE announced Q1 earnings yesterday, and the news was very good. "Funds flow," which is the source of money from which dividends are paid,was $632 million, or $1.76 per unit. Since PWE pays 34 cents in dividend per month (and has done so for about 2 years), $1.02 of the $1.76 was paid as dividends. A simple math calculation shows that the payout ratio is 58%. In the Canroy business, a payout ratio of less than 70% is considered good, and anything under 60% is excellent. At 58%, the payout ratio is quite low, which is very good.
But as soon as one calculates the current quarter's payout ratio, one must also determine whether the payout ratio will remain low, or whether decreased future funds flow might push the payout ratio up and cause a cutting of the dividend. The news here is also very good. The company stated that assuming oil at $107 and nat gas at $8.50 (while nat gas is at around $11 right now), funds flow in 2008 should be between $2.7 to $2.9 billion — in other words, funds flow in the rest of 2008 should be higher than in the first quarter, and I calculate that by the end of the year, assuming oil at $107 and gas at $8.50 (and I think gas will average at least $10/MCF in 2008), payout ratio should be under 50%.
So if oil and gas prices hold up at the thresholds above, the dividend is extremely secure. Since distributions will eat up about $1.3 billion, and the capex program will eat up under a billion of the funds flow, there should be several hundred million dollars left over this year and the company (correctly) plans to use that money to retire debt.
If you believe that oil and gas prices will hold up, you have here a company that will pay you a monthly dividend at an annual rate of 13% with an extremely low chance of missing the dividend. A 13% dividend yield while money market funds are paying 2-3% in this low-interest-rate environment is nothing to sneeze at—especially as many companies in other industries are cutting or eliminating dividends entirely. Also, since the dividend is pretty secure, downside on the stock price is pretty limited.
But what about upside? The upside is quite good too because as PWE's hedges come off in 2008, PWE's funds flow will increase substantially (I would estimate by at least half a billion) in 2009—EVEN IF OIL AND GAS PRICES DO NOT GO UP from where they are today. Of course, if oil and gas prices DO go up, then funds flow will increase exponentially (because much of the extra money received for the oil and gas goes to the bottom line).
In addition, I think PWE's assumption of nat gas at $8.50 is pretty conservative. If nat gas averages closer to $10/MCF this year (as I think it will), I would guess that would add several hundred million dollars to funds flow this year — causing funds flow in 2008 to approach, if not breach, $3 billion.
What are the risks?
- First and foremost, oil and gas prices. If they go down substantially, that would hurt the stock price.
- Second, just as is true in the US, the Canadian government can always roll out new tax initiatives that would hurt all oil and gas producers. In fact, such adverse tax legislation has been passed in Canada but is well known and baked into the stock price, though new initiatives obviously would hurt the stock.
- Third, this company has a fair bit of debt, so credit issues could conceivably hurt it, although with high oil and gas prices, PWE's ability to service (and retire) its debt is growing by leaps and bounds.
In conclusion, as investors discover this underappreciated asset, and realize that the 13% dividend (at today's stock price of around $31) is extremely secure, I would expect that the stock price will increase to bring the yield closer to 10%, if not less. This would yield a total return of approximately 40% this year, with steady monthly income and minimal downside risk. There are very few companies offering this sort of yield with minimal downside risk and a reasonably likely total return of 30-40% this year and probably more next year.
Disclosure: As you may have guessed, I am long PWE.
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This article has 78 comments:
As I mentioned in the article, the adverse tax consequences of the Halloween tax to which you refer (passed Oct. 31, 2006) have been well-appreciated by the market and incorporated into the stock price of all the Canroys.
What is NOT well appreciated is that the Canroys have collected "tax pools" that will shield funds flow AFTER 2011. In the case of PWE, the tax pools are expected to shield its dividends from tax for about 3 years--til about 2014.
Since that is 6 years away, and since I believe oil will be over $200/barrell (and gas over $15/MCF) by then, I am not too concerned about it.
However, I completely agree that there are a lot of oils out there that offer compelling upside potential. I have begun my due diligence on them (eg, CHK, COG, EOG, etc) and will invest there once I figure out which one I like the best. I am toying with the idea of buying a large position in 2010 LEAPS that, if oil and gas go where I think they will, could return 1000% or more in 12-18 months. But given the risk, I really need to study which one I like best.
However, PWE is a bit different from those other oils in that it pays an outrageous dividend (and on a monthyly basis!) that simply CANNOT be found ANYWHERE else with this level of safety, in my humble opinion. To some people, payment of a monthly dividend is a very important consideration.
Also, I believe that paying 15% in income taxes is also a major advantage, although that .
Having said all that, I believe some of the other oils have a greater upside than PWE, but heck, many people would think that a 30% almost guaranteed return in the next 12 months is a pretty compelling value.
Jack
Alberta wants to raise provincial taxes on these Canroy E&P companies, and this is one factor which has held them back. I consider them all takeover candidates by the majors, and even if they aren't bought outright, they will probabaly find some "master limited partnership" structure to morph into another suitable investment for high yield investors.
Just the fact that there are so few comments to this article/blog is an indication of how few investors really follow these. When I consider how many mortgage payments I've made off the dividends its no wonder I just can't stay away.
Some investors just can't invest in the great domestic nat gas plays - I spend too much time promoting responsible energy development, I just can't buy Anadarko,Apache,BP,COP... - and many other in the alphabet that have done incredibly well. As soon as the masses discover these canroys they'll just grow quicker in share price.
Enjoy the ride.
thanks, HT
I bought PWE just after the crash and I am pleased with the company.
The tax pools were mentioned on PWE's conference call yesterday. I only listened and the few questions were well answered. Also, the questions were from unitholders. Besides the nice dividend yield, the company is well managed in my opinion.
Long position.
By chance do you know the PWE limit and how much more can they go for aquisitions??
I could understand this if this was some small company trading in the pink sheets, but this is a company with an enterprise value of $15 billion paying a 13% dividend. What kind of risky bond would one have to buy to just get 10% in this market?
What this tells me is that IF some respected analyst from a respected shop finally wakes up to this gem, it has a decent potential of moving well. And as we all know, the analysts are a bit like lemmings--once one of them picks it up, others will follow.
This is one of the worst "misprices" (IMHO) in the market today.
Jack
Thanks
Not a clue why Berkowitch would sell this stock NOW; prior to this latest earnings report, he might have sold because there were doubts about (1) how much PWE would benefit from higher O & G prices given their hedges, (2) how much interest would cost PWE given the high debt, (3) whether PWE would be able to digest the two large acquisitions (Vault and Canetic) accretively, and (4) most importantly, whether O & G prices will slide back substantially (not just a small correction like we had 2 weeks ago).
If you want to see some of these concerns in print, look for David Bui's SA article from about 3 weeks ago.
I disagreed with David and I bought into the company before it announced earnings but decided to write the article once the above concerns were put to rest.
I believe ALL of these concerns HAVE been put to rest, and I still cannot believe that not a single analyst has issued a single upgrade on the stock.
Jack
I don't like HTE anymore. I sold out my large position in it about two months ago at about $25 after making about 15% on it in 6 months. I sold because I thought their last earnings announcement (was it in March?) was terrible, and exposed a major problem on the refinery side.
Crack spreads were terrible, and unfortunately, I believe they will continue to underperform the upstream side of the business and act as an overall brake on margins.
I think PWE's potential return going forward is far greater than HTE's.
Jack
The currency question is complicated because you must look at the US dollar versus other currencies when selling oil abroad, but because the company is Canadian, you must also look at the exchange rate (because dividends are declared in Canadian dollars but paid to Americans is US dollars at the prevailing exchange rate on the day of dividend payment).
BUT, over the next year, I do NOT believe the US dollar will either drop or strenthen that much against foreign currencies (it's awfully low already, and I think as we go to increasing domestic interest rates, that will firm up the dollar).
I feel the same way regarding the US versus Canadian dollar, though for different reasons.
However, if you were of the opinion that the dollar would strengthen a lot against foreign currencies, some people would argue that would deflate oil prices, and that would hurt PWE.
As to interest rates, I also don't expect much movement there for at least the next 6 months. I believe the Fed will stand pat at the next meeting, and probably the one after that. Then it may begin a slow rise, but 25 to 50 basis points is not going to make a big difference.
Another reason that interest rates won't make a big difference to PWE this year is that PWE just refi'ed $475 million of its floating rate debt, and most of the rest of its debt is fixed for at least a year--maybe longer, from memory. Thus, PWE is only very lightly exposed to floating interest rates--even if interest rates were going to increase, which I don't think they will in 2008.
In addition, PWE is going to make an excess $100 million per quarter this year (assuming WTI at $107 and AECO gas at $8.50, which are reasonable, if not conservative, assumptions) and they stated on the conf call they will use that money to retire debt.
So my guess is that by the end of the year, they will have no floating debt and 1/2 a billion overall less debt. Not only will that strengthen PWE's balance sheet, but the interest saved on $500 million debt should amount to about $30 million per year which will be added to funds flow.
Unless oil and gas crater, or some terrible disaster occurs, I can almost guarantee a 30% return on this company in the next year, and 50% would not surprise me in the least.
How many other stocks that have almost NO downside risk can one say that about?
Jack
As I listen to more and more conference calls, I tend to not want analysts to ask questions. Here is what I have discovered:
1. If an analyst has left the conversation...He will ask a question that had already been answered.
2. If an analyst doesn't like the answer (or doesn't understand the answer), he will ask the same question three times.
3. Then there is uh the questions you know I mean that uh in other words. Drives me nuts when they can't speak for more than two sentences without using uh.
I get more clear and concise information by reading the quarterly and annual reports.
Thanks for this great write-up and discussion. I look forward to reading your next one almost as much as my monthly dividend check from PWE.
CanRoys look like a great solution, and I really appreciate the insight offered by the comments above, but I can't quite get a handle on the tax treatment. Looking at PWE today: Yield 4.08 (13%), if it makes monthly payouts, my account should see $34 (for 100sh) each month. My ROTH account is tax free.
Wil I see $34 each month, or something less, and if something less, where is the balance and how do I recover??
Thanks
Sue :-)
Not so fast there. Never underestimate the ability of a socialist government to seize corporate wealth. PWE has a LOT of downside risk. Both by new government taxes and by the ever-so-volatile natural gas prices.
Risk vs reward
On May 09 01:16 PM User 171371 wrote:
> Owned Petrofund,PWE,AAV,PDS and PVX.Have sold all except PVX because
> of on statement made by many Canadian Politicians,"anything that
> comes out of the ground belongs to all the Canadian people".
>
> Risk vs reward
Some numbers for you. If energy prices stay the same as they are right now I show that PWE Funds from operations for 2008 will be around $3.2 billion dollars. That number small compared to 2009 when most of the hedges reset. 2009 funds from operations shows up at mind numbing $4.5 billion dollars. I put in an increase of production of 5%.
Yeah, it's safe to say the divi will be headed higher in the future. I can't believe some of the majors haven't taken a closer look at these.
Also, you get the exploration infrastructure for PWE for free.
I own AAV as well.
In addition, another big risk is much stricter environmental policy on drilling and oil sands development. Socialists are in bed with the environmentalists, dontcha know.
Examples like SGY, ARD are up 100% in the last year vs. flat for PWE. Hell even Canadian ECA is up 50% and if you go to 2 years PWE is down over 20%. So be careful and remember the Thornburg fiasco.
Carloz678
They did, however, do the magic thing. They raised the divi. PWE and AAV bought other trust when OIL/NG was on the skids and have yet to get the credit. Oil/NG could go back to $80/$7 and PWE could still make the divi payments.
Like I said, if energy stays the same, in 2009 when the hedges fall off, PWE could double the dividend and still have an extra $150 million to pay down debt.
Yeah, i've been layering a short position of USO for now. Still think NG has more upside and I will probably short that if NG get's above $13.50.
I don't believe we are getting any credit for PWE future earnings. They are massive. Now, if we could only get them to release the financial statements for Q1 2008. My numbers were off by around 5% and I want to know what I messed up.
First, there is ABSOLUTELY no question that PWE's stock price has FAR underperformed its fundamentals and the price of oil. But I believe that at some point, that perspective will change. And when it does, I think it will light a fire under the stock.
Three cases in point: DRYS, CHK and CSIQ. Up until a month or two ago, DRYS was trading at a ridiculous PE of 5, and there were all sorts of inane excuses given as to why that was--none of which made sense. But then, somebody or something lit a fire under this stock and it closed today at $92. 50%+ percent return in about 2 months, and its PE is still less than 10.
CHK also underperformed until about 2 months ago, and has gone up, what, 30% or more since?
Take CSIQ, which I recommended at $18.56 on these pages about 3 months ago. It was the lowest PE stock among all the solars, trading at a PE of 10, while the others were trading at PE's of 15 to 100. Why was that? Hell, I dunno, but it closed at $32.40 today.
My current favorite solar stock is TSL, trading at a PE of 12 (now the lowest of the solars) even though its revenues will almost triple this year (and its earnings will more than double from about $1.50 to $3.39). It hasn't moved yet since I recently recommended it, but let's see what it does.
PWE to me is in the same category of irrational pricing and I think there is a very good chance its fuse will get lit just like DRYS, CSIQ and others. By the way, note that PWE was buyable at about $30 when my article appeared this Mon. It closed at $32.30 today, a new high for PWE in the past several months. I would not be shocked if this were to be a breakout to $35-37. Look at what AAV and BTE have done over the past few months after a galvanizing earnings report.
Keep in mind that to get a 30% return on PWE in the next year, all that PWE has to go up is 17% because you are getting a 13% dividend. And it has gone up almost 7% since I recommended it on Mon (I bought calls on Mon or Tues when the stock dropped to about $29.70).
The bottom is that I cannot explain irrational investor behavior. All I can do is look for stocks that have much more upside than downside and to me, PWE is close to the top of that list.
Couple of other comments in the next post.
Jack
I do think they will raise next year, but nothing screaming, unless the stock has doubled and they feel they need to improve the yield. At 13%, they DO NOT need to improve the yield. They need the market to appreciate them.
Dave M quoted me first, and then said:
Jack said.."Unless oil and gas crater, or some terrible disaster occurs, I can almost guarantee a 30% return on this company in the next year, and 50% would not surprise me in the least. How many other stocks that have almost NO downside risk can one say that about? "
DAVE'S RESPONSE: Not so fast there. Never underestimate the ability of a socialist government to seize corporate wealth. PWE has a LOT of downside risk. Both by new government taxes and by the ever-so-volatile natural gas prices.
Dave is absolutely correct. I did specifically point out in my article that govt regulation can kill any of the Canroys, just as it did on Oct. 31, 2006. Without making light of this possibility, let me say that I consider this somewhat unlikely because the Canadian govt is running budget SURPLUSES, not deficits, and because the SIFT taxation plan is ALREADY going to add billions to govt coffers.
Finally, many Canadians collect these dividends as well, and oil and gas is a very important industry in Canada. So I think the Canadian govt won't get too greedy.
Jack
No, you have to take that 15% tax haircut off of the 13%, which makes it 11%. In a lot of cases, both IRA and taxable, you can not claim all of the 15% haircut as a foreign tax credit.
That's because, in taxable accounts, the IRS has income limit rules (domestic vs. foreign income) that severely hamper your usage of these foreign tax credits. Even though you can carry forward these tax credits for 10 years, if you keep holding PWE, you can never use them in the ensuing years until you sell PWE for an extended period of time. Bottom line is that the IRS makes life very hard for you to use these foreign tax credits.
Even tax-free accounts are not tax free--they are simply tax deferred until withdrawal, and if you do well at stock investing, your tax rate when you withdraw will be at the maximum rate (I know mine will be).
Of course, ALL my analyses, whether about PWE or any other stock, are PRE-tax because everyone has a different tax situation.
Having said all that, it is my understanding that I can claim as a CREDIT on my US tax return the 15% that is taken out of the dividend by my broker and in essence, be paid up.
Are you saying that is NOT correct? If so, can you tell me the source of that info?
Thanks, Jack
"Of course, ALL my analyses, whether about PWE or any other stock, are PRE-tax because everyone has a different tax situation. "
Furthermore, I doubt most people hold PWE in IRA accounts, but I certainly don't have that data.
I trade all my stocks and options in a taxable account because (a) I think taxes are going to be higher in the future than they are now, and (b) I don't ever expect my tax rate to drop below where it is right now.
Obviously, each person has a different tax situation. That is why ALL my articles speak about PRE-tax returns.
Jack
I will admit that was a bold, perhaps crazy, bet. But, it worked.
We'll see from their financials how this plays out.
This factor brings up another huge risk for PWE shareholders. At any time, PWE can announce that they are converting back into a corporation and abandon the trust formation. The dividend will be slashed severely and the income investors will bail out quickly. Other Canroy trusts have already converted because it frees them from the capital constraints put on trusts until 2011.
More importantly, if O & G prices remain above $107 and $8.50 (which seems more and more likely every day), PWE will generate an extra billion dollars in 2008 and 2009 ABOVE payment of dividend and ALL capex, making it extremely unlikely that they would need to raise capital.
Finally, PWE has announced they plan to remain a trust, and have eenough tax pools to protect income from taxation til 2014. Even if they were to convert, that is hardly the end of the world. One of the trusts recently converted (early) and its stock price is up 30% since the conversion as a function of O & G pricing. In others words, its conversion did not interfere with an increase in the stock price.
Jack
Can you put a dollar value on the hedging that AAV did?
I have preferred PWE because the fact that it has a higher dividend allows the stock to appreciate 30% and STILL offer an attractice 10% dividend. AAV's dividend is not quite as good.
But if AAV can sell more of its gas at market prices, that would put AAV ahead of PWE in this environment.
Jack
This is what this month's issue said about PWE (note that the issue came into my email box after market close on Fri; if Roger Conrad's opinion is influential, I would not be surprised if PWE trades up to close to $33 on Mon):
"Penn West reported a solid gain in distributable cash flow despite a 58 percent increase in outstanding shares because of acquisitions. The trust’s payout ratio sank to 58 percent, as it boosted output to 201,800 barrels of oil equivalent (boe) per day. Operating costs were flat sequentially with the fourth quarter, and debt fell slightly to 1.44 times cash flow.
During the quarter, Penn West faced criticism from some investors that it had forgotten about shareholder value in its drive to gain scale. The results betray some rough spots in integrating recent acquisitions. Higher energy prices, however, are doing a lot to grease the wheels, and there’s considerably more upside, as well as downside protection. First quarter realized oil prices were just CAD88.77 per barrel for oil and CAD7.98 per thousand cubic feet for natural gas, some 25 percent below current spot prices.
Management has pledged to use any surplus to further cut debt. But Penn West continues to face pressure to perform in coming quarters. Fortunately, still trading for just 1.66 times book value and an increasingly protected yield of nearly 13 percent, it’s still trading at a sizeable discount to its peers that seems less and less justified. Penn West Energy Trust is a buy up to USD38 for those who don’t already own it."
Well, you heard it from me first earlier this week when PWE was at $30. Roger Conrad is saying the same thing with the stock at $32.30, and he believes it's a buy even at $38. I would strongly agree with him.
Jack
Well, AAV did decrease their divi on Oil/NG weakness last year. They said at the YE conf call that they would not be raising their divi and would put that any extra money to work on production. However, I don't believe they foresaw $11 plus NG and $125 oil.
They will have to do something to get their share price up as they are pretty cheap and would be an easy takeover target. I owned PWI before the takeout and would assume the rest of the Canroys are getting looked at. I remember Cramer bragging about BTE but it has much more Heavy Oil. I think AAV is a better play.
For my money, PWE is the better play, but I think all the upstream oil and gas companies (whether Canroys or otherwise) will do well with oil and gas prices where they are.
Jack
Which one was that?
His CFPU for 2008 is $6.57 and $6.83 for 2009. His assumptions are oil at $100 both years and NG at $8.10 and $7.75 for the two years.
As to BMO Capital dude, I dunno what to tell you. Management says at AVERAGE PRICES in 2008 of $107 and $8.50, they will cash flow $2.8 billion, Capex is under a billion, and dividends is $1.3 billion, leaving $500 million to pay down debt. That number was reiterated on the conference call.
What numbers do YOU use for oil and gas in 2008, Dave M? I think the BMO dude's numbers for nat gas are very unrealistic, and I think PWE's oil number at $107 is reasonable, and may well be low.
As to RPU and PPU, I don't agree those are the best metrics TODAY. I stated what I thought the critical metrics are in 2008 in my article. PWE just bought out $4 billion worth of companies, and are in the process of integration right now.
To me, RPU and PPU will be much more meaningful once PWE has had 2-3 quarters to integrate these acquisitions.
Please be clear, Dave, as to what you are saying.
Are you saying PWE is not worth buying at $32?
Do you prefer another Canroy, and if so, why?
And what stocks are you buying that you think have a better risk-reward ratio than PWE?
Jack
Jack, AAV cut their divi in Q4 and if you use the cut divi for Q4 you would get a payout ratio of 62%. Also, AAV states in a presentation on their website that the payout ratio would be 61% if OIL $80 and NG $7.50. If Oil $95 and NG$ 9.50 their payout ratio would be 54%. Add to the extra 2,000 BOE they get when oil gets above $105 due to the call and it looks pretty good.
PWE payout ratio was below 60% and AAV will probably be about the same. PWE still has not released detailed financial statements for Q1.
AAV is a better takeover target such as PWI as they are smaller.
DAVE, the ANALyst a BMO is a moron and should be fired. PWE will have around $750 million of free cash flow after paying the DIVI and Capital Budget. That is assuming OIL and NG stay at their present levels.
When AAV was $10-11, I liked it better. At current prices, I like PWE better.
As to takeover status--the premiums paid at takeover aren't so substantial historically that it makes a big difference to me. But you are absolutely right that PWE is a pretty unlikely takeover candidate because of its size.
Jack
As for your assumption that Nat Gas will stay at these high prices, you are ignoring history. I can remember just back in 2005-2006 when everyone thought that NG prices would stay above $10. Ha! They promptly fell to $4. You think that the BMO analyst is unrealistically low at $8 NG? I think he is unrealistically high, and I have a lot of precedent to back me up. Nat Gas prices are notoriously volatile, and banking on $8-9 Nat Gas is foolish.
AAV has always been a poorly run trust. I used to analyze the heck out of these a few years ago and AAV always came up short. Maybe they got new management in the last year or so, but if they recently cut their divy, then it's probably the same lousy management. How can you cut your divy with these soaring prices? That's stunning.
""DAVE, the ANALyst a BMO is a moron and should be fired. PWE will have around $750 million of free cash flow after paying the DIVI and Capital Budget. That is assuming OIL and NG stay at their present levels.""
Big assumption there, huh? There's that word "ass-u-me" again. You like pie-in-the-sky assumptions and I like reasonable ones based on actual previous history. Besides, management would NEVER be guilty of putting out rosy assumptions, would they? LOL.
AAV cut their divi when OIL and NG prices were tanking. Just take a look the the rotten 6.75 hedge PWE put in for NG.
THe fact of the matter is that the DIVI for PWE is extremely safe with Oil at $100 and NG at $8. That goes for AAV as well.
BTW, I didn't use the pie in the sky assumptions that Goldman is puking out. Oil at $200 in the next two years? That looks pretty good to me.
If you are really bearish on PWE as you appear to be, sell your shares. If you really believe that PWE will not have enough money to pay down debt, sell your shares.
However, take a look at PWE Q1 numbers. They had $1.76 of funds from operations which adds up to about $682.5 million dollars. The divi and the capital budget combined is $620 million. That's free cash flow of $62 million. GO take a look at energy prices from Q1 to Q2 and rerun those numbers.
If you rely on an ANALyst to run your numbers you are behind the curve and may as well give your money to a mutual fund.
"You think that the BMO analyst is unrealistically low at $8 NG? I think he is unrealistically high, and I have a lot of precedent to back me up. Nat Gas prices are notoriously volatile, and banking on $8-9 Nat Gas is foolish."
There is NOTHING for me to defend here. I made it CLEAR in my article that if you did NOT agree with assumptions of oil at $107 and gas at $8.50, then PWE is not a good investment (nor are any of the other oils)
You obviously disregard futures market (I believe all of the strips, from front month to 5-year strips, are now at above $10), and you disregard that nat gas is still about 1/2 the cost of oil on a per-BTU basis. You also disregard that many of the oils are selling their forward gas production according toi the futures markets, and are getting upper $9's right now.
Instead, you put weight in "history," although CHINDIA and BRIC countries weren't a factor in history, and neither was peak oil.
Hey, that's cool. I'm not going to try to convince you about future O & G prices.
But given your bearish view of these prices going forward, I COMPLETELY AGREE with you that PWE would be a bad investment, as I said right at the beginning of my article.
And I still wanna know what you are buying.
Jack
The Dividends are safe as long as oil is $80 and and NG is around $8. So, buying the $100 put in Oil and $8 put in NG can be paid for by the divi and you will be heavily in the money before the divi would be decreased. Oh, that's also assuming all this production money doesn't provide for increased production.
BTW, I'm somewhat concerned about the AAV "collar" (so, Jack may have something on the AAV management quality). That's a dumb thing for AAV to do considering they are a producer? Texas Hedge? However, it worked. As long as they disclose their "Hedging" monthly, I can run the marks myself.
That being said. Both AAV and PWE loaded up with mergers when NG and Oil were much lower and these mergers are now highly in the money.
Obviously, this was too good to be true.
So, someone who has a ROTH account and is looking for high dividend stocks should look elsewhere -- but where???
Sue :-)
Look at the US version of it. PBT. They 8.80% and don't have the advantage of increasing production like PWE.
If I wasn't so long this stock I might put some in an 401/IRA/Roth.
But what about the others he mentioned: GNV, OCNF, FLY, ONAV, and TNH. These are not in the oil business, but with dividends greater than 14% - and I don't think Canadian - they look attractive to me for a tax-free account (unless the risk is outrageous). Do you have an opinion here?
Thanks, Sue :-)
I've looked at PGH and don't like their numbers. For Q1 they paid out more than their funds from operations. Fund from operations was $216 million. Their dividends and capital budget were $267 and $94 million for negative cash flow of $45 million.
PWE had positive cash flow and I believe AAV will be the same. I believe AAV will be forced to raise their divi this year.
HTE, I'd have to model their refining operations. I know Q1 was a meltdown for refiners. However, if they refine heating oil/diesel they would be rocking as crack spreads are above $25 for at least the next year.
BTE has already raised their divi and the LUV for that is already baked in.
Hey, as a Royalty Trust. I assume there is regulatory requirements of the amount of cash that must be paid for divi. Does anybody know that? I thought I read that they must pay at least the amount equal to their net income as a divi?
I would stay away from HTE. I think there is a SUBSTANTIAL chance (say, greater than 15%) of a divi cut in that Canroy.
The chance of a divi cut for PWE, in contrast, is probably 1% or less.
Jack
One thing you failed to mention is that this and other CanRoys offer a wonderful Dividend Reinvestment Program(DRIP). Reinvested monthly at a 5% discount to a 20day average and brokerage fee free to boot. Also some allow you to invest up to $1000 monthly in addition at the 5% discount and broker fee free....Icing on the cake..
But for minimally-volatile PWE, the DRIP is an especially good idea. I don't think they do the extra $1000, though.
jack
The Capital Budget was higher than their forecast of $240 million and came in at $278. Their Distributions were $382 million. This equals $660 Million.
Energy prices were $7.98 and $88 for NG and OIL. Their free cash to pay these items was around $630 million. This puts them short $30 million to be flat. Your boy at BMO said his assumptions were:
"His assumptions are oil at $100 both years and NG at $8.10 and $7.75 for the two years. "
His "guess" is off by a boatload as some of the hedges fall off and they will get more for their NG & Oil next year. I can't believe he is that far off and it is his job to model these things.
I was off on my calculation as I gave PWE credit for the combined company at the beginning of the year instead of starting on the 10th. This would have given PWE about another 10,000 BOE equivalent a day which would be other $40 million in cash. Also, they stated their capital budget would be $240 million not $278 million. We'll have to see if they increase that estimate.
I have always preferred to reinvest my dividends. Is this an option in their case?
Jack
Is there a way, other than by another posting here, to have done so?
You're welcome.
No need for further thanks!
Given that it's up 10% in the past week, ope you picked up some PWE!
Jack Yetiv
About the DRIP... I currently tell my ameritrade account to reinvest my divs (just looking for growth, rather than using the cash flow). They call it a DRIP, but the math does not suppport that 5% discount--although the canadian tax is taken out prior to buying more shares :( Do I have to work directly through PWE to take advantage fo the 5% discount. If so, how do I go about doing that? I want to make sure I am not missing out....
I will ignore the fact that I may not have been using this discount over the past year I have owned (CNE prior to the M&A). Thanks.
I really don't know how the DRIP works since I collect the cash instead and then decide how to deploy it.
Go to the website and send IR an inquiry and I'm sure they'll tell you what you need to know.
Not a bad $5 run since I recommended it at $30, huh?
I simply cannot believe no analyst following this company has issued any sort of upgrade since earnings came out on may 6. With the second quarter more than 1/2 over and with oil and gas 20% above the $107 and $8.50 on which PWE based its projections for this quarter and all of 2008, PWE is simply going to blow out the numbers when it reports the second quarter.
And despite the 15% rise in the stock price, the market is still substantially UNDER valuing this company. Although in the article I conservatively said I was looking for $40 by the end of the year, if oil and gas stay right where they are the rest of this year, I now think PWE will be $50+ by the end of this year.
Of course, if oil goes to $140-150 as some are predicting (which will probably take gas to between $12 and $13), I think a stock price of $60+ is well within reach by the end of this year.
Jack
Notice that PWE is using its unit value to make more acquisitions. They have very astute and aggressive management. It makes no sense for them to let the payout ratio drop any further, with the massive increases in cash flow coming down the pike, when an increase in dividend payout will translate to an instant increase in unit value on the market they can use for even more acquisitions. I believe a dividend increase to 50 cents a unit or thereabouts is not only possible but likely in the very near term, and $60/unit market price is entirely possible this year. If 34 cents was no strain for them with oil below $70 the last couple of years, what payout can they afford with oil at $150?
I orginally thought Harper's drastic action would bring his govt down and the Liberals would then restore the tax status of at least the energy trusts. The numbers used to justify the tax change are just slightly less real than Bush's WMDs. (Every competent economist that has looked at it agrees) I hoped to make a quick killing. However, the NDP propped him up in return for other concessions. I didn't make my killing (YET), but I haven't found any persuasive reason to sell these units. I would have to be a genius to exceed the 12% virtually guaranteed return I getting off of this while I hold it.
WHEN (not if) the Liberals regain control some time this year or next, the tax on CanRoys will drop to 10%. Even if for some unforeseen reason the Liberals decide to keep the tax rate at 31%, the likelihood of PWE ever paying that actual rate is miniscule. Virtually all of their income will be sheltered in one way or another for many years to come.
In summary, your 50% high end estimate is very conservative, IMO.
How will the buy out of Endev affect the stock price and/or the dividend?
Thanx