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Huge dividend + valuable assets + hated sector = BUY



March 12, 2008 – Comments (5) | RELATED TICKERS: PWE

Penn West Energy Trust (PWE) is the largest CANROY aka Canadian Royal Trust.  CANROYs are similar to the MLPs that are available here in the U.S. in that they pay huge dividends in exchange for tax benefits from the government.  The difference is that the Canadian government pulled the rug out from underneath CANROYs during the "Halloween Massacre" and decided to start taxing them despite campaign promises that they wouldn't.  That's why this is a much hated sector and many investors are staying away from it.  The new taxes don't kick in until 2011 and even then most CANROYs have built up huge pools of reserves that will enable them to avoid paying taxes for at least another year past that.  So by buying PWE today, one basically will be able to collect a dividend of at least 15% (paid monthly!) for the next four years.  By the time that 2012 rolls around the company will have to decide if it wants to try to reorganize as an MLP here in the U.S., change into a normal corporation and focus on growth, or do something else.  I'm not too worried about what form PWE assumes because oil will be over $150/barrel by then and the company's assets will be worth so darn much it won't matter what they do.  For goodness sake, oil has risen from $60 to $108 over the past year and yet PWE's stock had dropped from around $30 to under $28.  Here's the simple formula that I used to decide to purchase PWE

Huge oil and gas assets in a country that borders the U.S. + huge sustainable dividend for the next four years + hated sector that provides a discount versus other similar companies = BUY.

Long PWE

5 Comments – Post Your Own

#1) On March 12, 2008 at 7:58 AM, chk999 (99.97) wrote:

While I agree that resources in a country close to the US with a stable government are valuable, extrapolation of energy prices is a tricky game. Oil is cyclical and just about the time that everyone decides that the price will go up forever is when the rug gets pulled out. The major producers seem to be using 45 a barrel as their hurdle rate for new projects in their internal planning. My suspicion is they know more than I do.

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#2) On March 12, 2008 at 10:09 AM, Gtrinvestor (96.82) wrote:

chk999, I am in agreement with you that there will be a big drop in oil prices soon.  Long term Deej is probably right about the price of oil, but I am guessing that right when alt energy starts really looking to take hold, and their are billions of investments out there, OPEC is going to pull the rug out from everyone w/ huge production run-ups that they will disclaim any knowledge of.  OPEC wants to make this one hurt, so people stay away from alt energy for another 20 years. 

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#3) On March 13, 2008 at 6:46 AM, TMFDeej (98.34) wrote:

I've heard the theory about OPEC being able to crank up production to a really high level to pull the rug out from under the alternative energy players.  The Economist got a lot of egg on its face years ago for running a front page article about that theory.  I have done a tremendous amount off reading on oil over the past year and I have personally come to the conclusion that there's almost no way that OPEC could do this, even if they wanted to.

Countries like Saudi Arabia are very secretive, so nobody knows for certain what their reserves and production capacity are, but after reading a number of books like Twilight in the Desert by Matt Simmons and Humbert's Peak I would be shocked if they had the ability to dramatically increase production. Quite frankly, I highly doubt that they would want to unless oil got to a level that threatened to cripple global economic growth. The world has already proven that it can for the most part live with $100/barrel oil.  Why would Saudi Arabia want to make less than that?  Their economy desperately needs the money that oil is bringing in.  They would have huge problems at home if there was a substantial drop in the price of oil.

Furthermore, given the way that oil wells work, OPEC countries like Saudi Arabia would seriously risk damaging their ability to maximize the production at their existing oil fields by cranking up production to an abnormally high level.

They keep saying that they don't need to increase production, yada, yada, yada yet few people mention the fact that all of the excuses that they have been using for not increasing production might be masking the truth...that they cannot do so in a meaningful way for a sustained period of time.  It's an interesting theory.

In the meantime, I would not be surprised at all if oil fell by $10 or $20/barrel at some point this year.  Still the long term dynamics of the situation, the impact that a still falling dollar has on commodities that are priced in dollars and the rising demand from emerging markets are enough for me to be very bullish on oil in the long run.


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#4) On March 13, 2008 at 2:42 PM, dennis1447 (< 20) wrote:

Boone Pickens is shorting the oil and gas industry expecting oil to pull back by $20 to $25 a barrel before resuming its upward climb. I own a nice chunk of PWE and don't want to sell or place a stop loss order if I can find a smart way to hedge against a selloff. Are there any ETFs or CEFs that short the oil and gas market?

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#5) On March 13, 2008 at 4:04 PM, TMFDeej (98.34) wrote:

I believe that DUG is an ultrashort for oil if you want a temporary hedge.  I don't know of any for natural gas though.


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