Canadian Oil Sands, Penn West Energy Protected on the Downside 32 comments
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A positive trend for oil price drives investment value in buy-recommended Canadian income stocks Canadian Oil Sands Trust (COSWF.PK) and Penn West Energy Trust (PWE). Near-month futures price continues to bump against an upper limit at 40% above the 200-day average. Though the trend may point to higher price, we stick with $150 in 2010 as a sustainable level.
A potential punitive windfall profits tax that would unfairly discriminate against U.S. producers may drive up oil price further to the benefit of Canadian and non-U.S. producers. With higher Alberta royalties taking effect next year in most cases, Canadian producers may be free of additional tax increases for awhile. Conversely, at some point oil price may fall back to settle around the 200-day average, currently $105 a barrel, as has happened in the past. Our protection on the downside is that at McDep Ratios of 0.90 and 0.84, the stocks are priced for oil at perhaps $90 and $84 respectively. We regard COSWF as a unique, high-quality long-term asset while we expect PWE to be a profitable, well-run conventional oil producer as it integrates recent acquisitions.
Originally published on July 11, 2008.
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This article has 32 comments:
With that payout ratio, PWE will be able to pay off a substantial amount of debt this year, increase capex, AND further increase its dividend at the end of 2008.
Although I doubt oil will go over $150 this year (barring an Israeli attack on Iran), I also think it unlikely that oil will go under $110 for any prolonged period of time this year. I also doubt we'll see nat gas averaging under $9.50 for any quarter this year (even though we're at about $9 now).
If I am right about oil and gas prices, PWE's free cash flow (cash flow not used to pay dividends) will more than double in 2008 versus 2007.
Jack
Who can't claim the 15% credit back in the US? I was unaware of that. Considering that MOST investors get the 15% back, and are not double taxed, then this is apples to appples vs. some other tax advantaged cash flow/dividend investment.
Second, how is the theoretical net lowered by a match in DUG? Would you please explain the numbers? Are you saying that the opportunity cost of the 50% position is eating into yield? I don't see how the yield gets knocked down to 5.5 or 6%.
Matching your investment with a 50% position in DUG (i.e. for $100K invested in the basket, 50K goes into DUG - which yields ~2%) would cause the investment to be market neutral - extracting dividend yield. At that point, your yield is contingent upon whether or not the trusts lower distributions.
thx for your input.
While criticizing my detailed articles, you write a couple of sentences that won't even pass for analysis. Why don't you actually ANALYZE something and CONTRIBUTE to this site, rather than just superficially dismissing someone else's analysis.
Since I began recommending stocks on this site nearly one year ago, the Dow and Nasdaq have dropped 20%. My recommendations have about broken even--while CSIQ has increased about 50%, TSL has dropped by about 30%. My PWE recommendation has gone down about 3%--but REAL dividends have more than compensated for that PAPER "loss" and I bought some more today at $28.50 for a div yield of 14.3%.
So my recommedations have just about broken even (actually, up a few percent), despite the broad markets having dropped by over 20%.
Many financial managers and experts have done FAR worse in the past year than breaking even.
Finally, let's revisit this issue in a couple of weeks, after TSL, CSIQ and PWE have reported.
In the meantime, what are YOUR recommendations to SA readers?
Jack Yetiv
Seriously though, how do you see the PWE payout being sustained, is there any history in PWE's past that suggests when they might cut a payout, i.e. if oil goes to $104 within 2 quarters they'll cut the distribution by X%?
I realize that's asking alot but you seem to know what you're talking about.
Recall, also, that PWE hedges a fair bit of its future output. Oil and gas prices in the past five or six months have allowed PWE to forward-sell its oil and gas at well over $120 and $10. We will learn this Thurs how much production PWE has hedged, and at what price, but I guarantee you it will be substantial. Thus, even if nominal oil and gas prices drop from here, what PWE makes in the future can actually increase--SUBSTANTIALL...
Finally, remember that--despite the recent major drops--oil today at $120 and nat gas at $8.70 are still higher than at ANY time in 2007. Therefore, the Canroys are still on track to have a blow-out 2nd quarter, and a very strong 3rd--compared to any previous time in history. Of course, if what we are seeing now proves to be close to the lows, then some incredible returns will be made on the Canroys over the next few months.
But even if oil goes to $100, and nat gas stays in the $8's (both of which I doubt will happen), PWE will STILL make more money in 2008 than it EVER has previously. Thus, the dividend seems very secure.
To me, the downside risk is pretty limited, while the upside potential is significant--and you are collecting 14% all along.
Jack
To continue the payout, PWE had to issue Bonds.
Remember, much PWE production is hedged and/or is NG- so you will want to underhedge. The oil market will move much more violently than the equity market which can force retail player out of the position and get you whipsawed.
IMO, better to just get long the canroy's if you like oil, ng...
Their earnings appear to evaporate despite record cash flows, I don't have a clue as to what their goals are. Perhaps, they are preparing for life after 2011 by incurring as much debt as possible now.
% discount to relative book value is what most Oil & Gas companies trade at in the Market. That said looks like a $26-28 price point is in the cards for quite a while.
This is a strong company and we can expect distributions to stay where they are now without much risk. I feel badly for those of you (including myself) who bought at highter prices expecting the double gain of a unit price increase along with a great distribution payout.
Now is a great time to buy if your a dividend investor. As for the rest of the longs under water. Hold your breath - eventually the loss will be recovered but it will take a few years!
No matter. I know I've blown it more than once. So its back to the drawing board, so what.
Another two trusts I own are Baytex BTE which I don't see anyone mentioning and Freehold FRU (which trades only in Canada). These are two excellent trusts. Can someone tell me why they love Pengrowth, I see only declining reserves on a per unit basis.
In terms of other hedging strategies, both BTE and PWE trade options. I do a lot of out of the money covered call writing on the trusts, I get the income, the option premium, and something more if it is called away. All I give up is the home run if the stock runs away.
What all the Trusts mentioned need is ONE BIG BUY OUT AT A 50% PREMIUM. If McDep is right, which I think he is, the assets (known reserves) are materially undervalued. Personally, I will be surprised if we don't see multiple buyouts in next 18 months; in part motivated by the tax law change. The big dogs in the industry, Exxon, Chevron, BP, etc. need to increase known reserves and the most certain way to do that is to simply "buy" know reserves. This especially true if you think better to have your stash close to home vs. in a far away desert.
I owned CNE prior to its being sacrificed to PWE. My holdings of PWE consist of the stock issued to buyout PetroFund(PFT) and Canetic. Both of these trusts died because of PWE.
You are right about everything except the final result. They issued debt to pay the dividend because they didn't have the cash to do so.
I believe they sold a stake in a Wind Farm in Canada last year to fund a dividend. What part of that asset was not to like? I have read rumours that they own a light sweet crude field of 400 million brls. which is being held off the books. Talk to me about mismanagement and I give you PWE.
I see long term debt increasing and retained earnings decreasing....I also see their accounts receivable increasing but what worries me most is the debt. I'd like some insights about this issue. It seems they have invested some capital in plant and equipment but I don't know about their projections to cover the debt.