Notes
"Penn West Energy Trust (PWE) is the largest conventional oil and natural gas producing income trust in North America. Based in Calgary, Alberta, Penn West operates throughout the Western Canadian Sedimentary Basin. Penn West's estimated production for 2008 is in the range of 195-205 mboe per day, of which just under half was natural gas.Note, $ means Canadian dollar.
The company reports make frequent reference to "funds flow" which seems to be a Canadian standard strongly related to cash flow. In a recent report, it was calculated as:
== cash flow + "increase in non-cash working capital" + "asset retirement epxenditures"
Cash flow was 90% of funds flow, in the most recent report.
THE DIVIDEND (from the 2007 annual report)....
Payout ratio in 2007 was between 70-75% of funds flow
Penn West currently yields around 15%, but trying to evaluate it based on its dividend is very complicated. The Canadian laws regarding taxes of dividends from trusts are changing, there are various accounting gimmicks and "tax pools" that can affect the tax. The government will implement a new tax (SIFT tax) in 2011.
"Under the SIFT tax, distributions from certain types of income will not be deductible for income tax purposes by SIFTs in 2011, and thereafter, and any resultant trust level taxable income will be taxed at approximately the corporate income tax rate. ... As the Trust currently has a significant tax pool base and expects to increase its tax pool base until 2011, it is expected that the Trust could shelter its taxable income for a period after the effective date of the SIFT tax. Distributions of this nature would not be currently taxable to unitholders as they would represent a return of capital that would continue to be an adjustment to a unitholder's adjusted cost base of trust units. Distributions from income subject to the SIFT tax will be considered taxable dividends to unitholders and will generally be eligible for the dividend tax credit. The SIFT tax was not intended to adversely affect the after-tax yield of Canadian investors who hold Penn West units in a non-tax deferred account.
"...At the present time, Penn West believes some or all of the following actions will or could result in the future due to the SIFT tax:
* If structural or other similar changes are not made, the distribution yield net of the SIFT tax in 2011 and beyond to taxable Canadian investors will remain approximately the same; however, the distribution yield to tax-deferred Canadian investors (RRSPs, RRIFs, pension plans, etc.) would fall by an estimated 29.5 percent in 2011 and 28.0 percent in 2012 and beyond. For U.S. investors, the distribution yield net of the SIFT and withholding taxes would fall by an estimated 25.1 percent in 2011 and 23.8 percent in 2012 and beyond;
* A portion of Penn WestÕs funds flow could be required for the payment of the SIFT tax, or other forms of tax, and would not be available for distribution or reinvestment;
* Penn West could convert to a corporate structure with yield in the form of dividends to facilitate investing a higher proportion or all of its funds flow in exploration and development projects. Such a conversion could result in the reduction, or the elimination, of the current distribution program in favour of higher capital investment and/or a dividend payment program; and
* Penn West might determine that it is more economic to remain in the trust structure, at least for a period of time, and shelter its taxable income using tax pools and pay all or a portion of its distributions on a return of capital basis, likely at a lower payout ratio. Further, as the SIFT tax rate exceeds the corporate income tax rate that would be applicable to Penn West, the tax strategy might involve paying some corporate tax resulting in all or a portion of those distributions being paid on a return of capital basis at a lower payout ratio.
5APR08 - $28.63
Note, the Canadian and US dollar are almost identical as of this writing.From the recent annual report for 2007....
Funds flow was $1.3 billion, or $5.56 per unit (share). In 2007, there were
Return on capital employed 8.9%
Total assets (millions) $ 8,433
Return on equity 3.6%
"...Further, in the second quarter of 2007, the enactment of the SIFT tax led to a $325.5 million non-cash, future income tax charge during the period. During the fourth quarter of 2007, the Government of Canada announced rate reductions that led to a $106.4 million reduction in the period. If neither the SIFT tax nor the tax rate reductions had been enacted in 2007, return on capital employed and return on equity would have been 13.1 percent and 8.1 percent respectively.
"Based on a forecast WTI oil price of US$80.00 per barrel, a $6.75 per GJ natural gas price at AECO and a CAD/USD exchange rate of par for 2008, funds flow for 2008 is forecast to be between $2.0 billion and $2.1 billion. Based on this level of funds flow and other factors, we estimate 2008 net capital expenditures of approximately $960 million.
Last year, funds flow was $1.3 billion, so management predicts funds flow growth of 54%
Yahoo (so, US $ here)
Market Cap (intraday): 10.71B
Enterprise Value (5-Apr-08): 12.65B
Trailing P/E (ttm, intraday): 39.54
Forward P/E (fye 31-Dec-09): 10.97
PEG Ratio (5 yr expected): N/A
Price/Sales (ttm): 5.34
Price/Book (mrq): 1.52
Enterprise Value/Revenue (ttm): 6.32
Enterprise Value/EBITDA (ttm): 10.566
Less than 10% of book value is goodwill.
The EV/EBITDA and forward PE are roughly in line with competitors such as XEC, XTO, DVN, HTE, and CNQ. The company is only followed by one US analyst. The P/B ratio of 1.5 is also better than average; the PS ratio is a higher than average.
Kurt Wulff, an oil analyst who publishes his recommendations online, like PWE. He likes to calculate the ratio of the enterprise value to present value of oil & gas reserves (Mcdep ratio). By that measure, PWE is one of the best Canadian trusts. http://www.mcdep.com/
Thoughts. The dividend situation is complicated, so let's just ignore it and look at other valuations and fundamentals. Management predicts cash flow growth of over 50% for the next year. However, there are 50% more shares outstanding now (because of acquisitions), so there won't any improvemnt in the P/CF ratio. The new taxes don't kick in until 2011, so at the moment PWE looks like a cash cow. It has made two acquisitions recently, which has added to debt, but the balance sheet is serviceable. I like the 30% weighting to natural gas: gas is underpriced relative to oil, and likely to benefit from environmental legislation.
12JUL08 - $31
"For the full-year, we forecast funds flow between $2.8billion and $3.0 billion ($7.40 to $7.90 per unit-basic)"
Tangible book value: $5.3 billion
In the annual report, management predicted 50% cash flow growth (not per share) based on $80 oil. Now we have $140 oil....
23JAN09 - $12.35
Press release from early January:"We currently have approximately 31 percent of our 2009 crude oil production hedged (before royalties) with a floor WTI price of US$80.00 per barrel and a ceiling price of US$110.21 per barrel. Approximately 20 percent of our 2009 natural gas volumes have been hedged (before royalties) with floors of CAD$7.88 per gigajoule and ceilings of CAD$11.27 per gigajoule at AECO."
"At planned levels of 2009 capital expenditures and current 2009 future commodity price strips, we believe the appropriate distribution level is $0.23 per unit per month. Accordingly, our Board of Directors recently approved a reduction to our monthly distribution to unitholders from $0.34 per unit to $0.23 per unit for the next two months, subject to changes in commodity prices, production levels and capital expenditures."
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