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Penn West Energy Distributes High Income Rate to Shareholders

by: Kurt Wulff June 16, 2008 | about stocks: PWE    
Kurt Wulff

Kurt Wulff

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We raise estimated net present value [NPV] of buy-recommended Penn West Energy Trust (PWE) to $45 a share up from $37, presuming a long-term oil price of $100 a barrel, up from $80.

First quarter results released on May 13 recorded a 50% volume gain with the closing in early January of the Canetic and Vault acquisitions. Projected volumes along with current futures prices promise a continuing high level of unlevered cash flow (Ebitda). Projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) supports NPV.

The cash flow outlook is boosted by a continued uptrend for oil price and more recently natural gas price. About half of cash flow is distributed to unitholders to provide the highest rate of current income of any of our buy recommendations. The remaining cash flow can be used to repay debt or to fund new production on the trust’s vast land position.

Originally published on May 14, 2008.

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This article has 23 comments:

  •  
    Jun 16 07:59 AM
    Buy PWE at your own risk. Management has been less than transparent about their current ability to continue the present payout.

    Return on Assets has been sadly behind others in the same industry. If oil were to return to $100, their payout would be cut.
    Reply
  •  
    Jun 16 09:52 AM
    Another highly ignorant posting..ala David Bui, who also knows nothing about PWE. PWE will be coming off hedges that will see new positions taken at much higher prices..even if oil drops to $100...for which, of course, NO foundation or scenario is laid! PWE along with LINN Energy present highly valuable streams of cash and long lived resource bases. We've been down this road with the PWE whiners...TAKE A LOOK AT THE CHART..TAKE A LOOK AT THE RETURN IN THE PAST 9 MOS!
    Reply
  •  
    Jun 16 10:05 AM
    The above comment by Paultaut has no connection to reality.

    Management has been quite clear that taking their hedges and production into account, if oil were to stay at $107 and gas at $8.50, payout ratio would drop below 50%. Indeed, with oil/gas at those levels, PWE would be able to pay all dividends, all Capex, and STILL have $500 million left over this year to retire some debt, increase Capex, and possibly increase the dividend a bit (management has correctly stated that the latter is not planned to happen until the end of the year).

    To suggest that the dividend is in danger with oil now at nearly $139 and gas at almost $13 is beyond absurd. Indeed, this quarter, the company's oil/gas assumptions will have been surpassed by a large margin, meaning even greater cash flow than predicted by PWE. Oil has averaged over $120 (more than 10% greater than $107) and gas has averaged somewhere around $10.50 or $10.75 this quarter (about 25% higher than the $8.50 assumption used by PWE), so it is almost inconceivable that PWE will be unable to cover its dividend.

    Indeed, I expect a BLOWOUT second quarter to be announced in early August, and I expect this stock to be trading north of $40 by mid-August, and, assuming oil and nat gas at $115 and $10.50 (which seem to be rather conservative assumptions these days) to be close to $50 before the end of this year.

    Including a 12% dividend rate paid monthly, that is an annual return of nearly 100%.

    Jack
    Reply
  •  
    Jun 16 11:12 AM
    One of the few holdings I have that I will hold till the day I die.
    Reply
  •  
    Jun 16 11:50 AM
    i own pwe stock and during these times dividends and cash are KING.
    Reply
  •  
    Jun 16 01:22 PM
    I own and love PWE, but what about the P/E? Yahoo Finance lists it at 58. If this is correct, is this high? Anyone worried about it being overpriced when the majors like XOM have P/E's around 12?
    Reply
  •  
    Jun 16 02:12 PM
    the PE is correct, I owned PetroFund, it was taken over by PWE, they informed US shareholders that when the merger took place there would be a share distribution of a Driller, they changed the terms in midstream.

    I owned Canetic, it too was swallowed by PWE. The yield at Canetic was far superior to PWE's.

    PWE has had to sell Assets to maintain its dividend.

    I own PWE but do not trust the management. I read somewhere that they have "off the Balance Sheet" assets, among them a 400 million brl. light crude field.

    So I still own them but I believe shareholders have the right to full disclosure and Management does not appear to agree.

    You can sing PWE's glory all you want. I speak from my experience. Who remembers PetroFund? Gives you an idea of how long I've held on to this piece of Eye Candy.

    With all of you pushing it, I hope to unload it in the low to mid 40's. I'll then convert to another CanRoy which I can trust.
    Reply
  •  
    Jun 16 02:25 PM
    Sounds like Paultaut (1) holds PWE, and (2) expects PWE to go to mid-40's.

    Gee, and I thought he was negative on this stock!!

    Like I said (and as Paultaut appears to agree), I am looking for at least mid-40's (and probably around $50) by the end of this year--as long as oil and gas are over $115/$10.50.

    Jack
    Reply
  •  
    Jun 16 06:34 PM
    I have it, I love it, and I've got others too. It's paying me more in dividends than I'm spending in gasoline, every month. And when I retire, if it's still going, I'll just take the dividends to add to my social security. (Somehow, I think social security will be gone before the oil trusts die... "someone" will borrow from Soc Sec to pay for welfare or illegal immigrants, or some such idiocy.)
    Reply
  •  
    Jun 17 02:35 AM
    I just want to get out where I first got suckered in. I would have sold all of my PTF had I only known, as it is, I only took out what I had invested.

    Besides, PWE's chart pattern really sucks.
    Reply
  •  
    Jun 17 06:51 AM
    All the above comments is why I hold pvx instead of pwe.
    Reply
  •  
    Jun 17 08:37 AM
    Petrofund and PVX were among my first CanRoys, I picked up and still hold PVX from $8.50 around 5 years ago. I especially like their gas to liquids facility and West/East pipeline.

    I plan to get out of PWE and put it all into PGH which I sold to buy Canetic.
    Reply
  •  
    Jun 17 07:51 PM
    PGH is a good play. I hope you got in last week when the fear of a drop in oil was rampant. If so, you will be VERY happy in the months to come.
    Reply
  •  
    Jun 18 07:03 PM
    Regarding PWE's dividend, write this down: PWE does not want to increase the dividend (based on comments made in the last earnings release), will not increase the dividend, and should not increase the dividend. They have other plans for the cash, and at 12%, it's enough.
    Reply
  •  
    Jun 18 08:24 PM
    Herve,

    Take a look at the presentation they posted on the website yesterday. Given where commodity prices are, I believe they WILL increase the dividend a little, before the end of this year, just to pacify those who want to see a dividend increase, and because they will be able to easily afford it (payout ratio under 50%).

    Nunns made it pretty clear they do not intend to go below 1:1 debt to cash flow ratio, and I think at current prices, they will achieve that before the end of this year.

    So, if current prices hold, I believe they WILL increase the divi, but not all that much. Remember that a divi increase often gooses the stock by the same percentage (and sometimes more), keeping the yield about the same.

    Jack
    Reply
  •  
    Jun 19 11:23 AM
    THIS APPEARED ON ZACKS.COM TODAY:

    Penn West Energy Trust
    By Tracey Ryniec
    Jun 19, 2008

    Penn West Energy Trust is finding plenty of cash in oil and natural gas as crude prices remain near record highs. The company has a dividend yield of 12.10%. Penn West has surprised on estimates three out of the last four quarters. Its forward P/E is 11.34.
    Full Analysis

    Penn West Energy Trust (PWE) is the largest conventional oil and natural gas producing income trust in North America. The company, headquartered in Calgary, operates throughout Western Canada. Half of the company's daily production is in natural gas.


    Penn West, a Zacks #1 Rank (Strong Buy), engages in low-risk exploitation and development drilling, oil sands development in the Peace River Oil Sands area and, in conjunction with third parties, exploratory drilling. The company has an undeveloped land inventory of about 4.1 million net acres.

    On May 21, Penn West announced they were acquiring Endev Energy Inc. for $170 million. Endev Energy shareholders will get trust shares. Endev's current production is 78% natural gas and 22% light oil and natural gas liquids. The acquisition will add 3,500 barrels of oil equivalent per day to Penn West's production.

    Penn West Increases Production in the First Quarter of 2008

    On May 6, Penn West reported first quarter earnings that missed on analysts' estimates by 60.71%, or 34 cents. Net income was $78 million, or 22 cents per share, compared with $127 million, or 53 cents per share, in the fourth-quarter 2007, which included $106 million of one-time future income tax recoveries related to tax rate reductions. Analysts had expected 56 cents per share.

    Production increased 50% from the fourth-quarter 2007 to an average of 192,291 boe per day in the first quarter of 2008 compared to 128,024 boe per day in the fourth quarter of 2007.

    The company is forecasting its capital development budget for the year at $960 million, including $60 million for the Peace River Oil Sands.

    Production guidance is calling for volumes to average between 195,000 and 205,000 boe per day for the rest of the year.

    Consensus Estimates Rise for the Quarter and the Year

    Consensus estimates have been rising in the last 30 days for both the second quarter and the year as crude and natural gas prices remain elevated. For the second quarter, estimates rose five cents a share to 80 cents from 75 cents per share. For the year, consensus estimates increased 17% to $2.88 from $2.46 per share.

    Penn West Announces Dividend of 34 cents per unit

    The company's Board of Directors recently announced the distribution level of the Trust's dividend would remain at 34 cents per unit for the months of May, June and July due to current high forecasts of commodity prices and the company's projected production levels. PWE's current dividend yield is 12.10%.

    Penn West's forward P/E is 11.34. Its price-to-book is 1.05, under the industry average of 2.47. Year-over-year earnings growth estimates for 2008 are up 323.53%.

    =============
    As I have written in my articles and comments in SA, I agree with the STRONG BUY. I'm looking for PWE to hit $40 after earnings are announced on Aug 7, and to hit $50 before the end of this year.

    Jack
    Reply
  •  
    Jun 19 12:49 PM
    Jack: This is from the May 6 earnings release. I read into this that they are pleased to be able to keep the payout the same and apply cash elsewhere. "Penn West's funds flow is expected to be $2.7 billion to $2.9 billion for this year. Should commodity prices remain reasonably close to the current forward strip prices, our payout ratio would remain below our targeted range. This lower payout ratio(1) would afford us the opportunity to apply additional funds to debt repayment, adding strength to our balance sheet(2)."
    Reply
  •  
    Jun 19 01:49 PM
    Yes, Herve, and then they repeated the same thing during the conference call.

    However, during the presentation they gave at the CAPP (Canadian Assoc of Petroleum Producers) conference this Mon, he said something new--that they will not reduce debt below around $3 billion. This, if prices hold up around $120/$12 in 2008, they will have several hundred million of EXTRA free cash that they were not planning on when they announced in early May.

    Jack
    Reply
  •  
    Jun 20 10:11 AM
    Yesterday, Zack'scame on board--6 weeks after I wrote my article recommending PWE. Today, a newsletter I subscribe to (Changewave) sent out an email with a new stock recommendation--PWE. This is what they had to say:

    Dear WaveRiders,

    Earlier this week, we closed our position in Harvest Energy Trust (HTE). After looking at the other trust holdings left in our Cash Generators portfolio, we want to make another adjustment today.

    We know that a lot of you enjoy outstanding total returns from our energy trust plays since we began recommending them to you back in 2002. Pengrowth Energy Trust (PGH) has essentially bounced around in $20 to $21 range since our last update, and although the dividend is nice, we can find greater appreciation in other names.

    So, now is the perfect time to leave Pengrowth behind for another trust that has a greater upside -- Penn West Energy (PWE).

    Penn West will be a great addition for your portfolio because it not only pays out a 13% dividend, but, after doing our analysis, we are convinced that it will deliver much bigger capital gains than will Pengrowth.

    Penn West is Canada's biggest conventional oil and gas energy trust, and it has been on the acquisition path this year. It acquired our recommend company Canetic Resources Trust in November 2007, and also added Vault Energy Trust and Endev Energy to its holdings this year. This will significantly expand its asset base and lead to greater profits down the line as oil and natural gas prices remain at high levels.

    PWE is distributing around half of its cash flow to unitholders and using other funds to pay off debt, while reinvesting in its development program at record levels. And even though this is a Canadian energy trust play, it will be years before any of the proposed 2011 tax changes on trusts take affect -- if they happen at all.

    Our fair value for Penn West is $50 per share assuming a long-term price of $100 a barrel for oil and $8 for natural gas. Unless we see a crash in energy prices -- which looks highly unlikely at this time --PWE is practically guaranteed to have a blowout second quarter since forecasts are exceeding the $107 oil and $8.50 natural gas it used in its projections.

    PWE is currently paying a monthly dividend of 34 cents per share, and we anticipate significant upside when it reports second-quarter results in August, with little risk of a negative surprise.

    This is a great way to get into another income play with a bright future. Buy Penn West Energy (PWE) up to $35 with a Target price of $50.

    ====================
    This pretty much says what I said in my article 6 weeks ago (makes me wonder if the Changewave folks read it!).

    By the way, I agree about HTE and PGH, both of which have much higher payout ratios than PWE.

    Jack
    Reply
  •  
    Jun 20 12:16 PM
    Jack, thanks for the information!
    Reply
  •  
    Jun 28 01:33 AM
    P & F chart target is $11?! I would not touch this right now.
    Reply
  •  
    Jun 30 11:16 AM
    JACK: Q2 is over, what were the average prices for oil and natgas?
    Reply
  •  
    Jul 07 03:15 PM
    Jack, I recently bit on PWE at $34.18 and it suddenly corrected to the $31 range? What gives if earnings are expected to be up?
    Reply
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