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One of my favorite plays for $200 oil



May 07, 2008 – Comments (3) | RELATED TICKERS: PWE

Goldman Sachs came out with a report yesterday stating that it believes we may see a Super Spike in the price of oil that could bring it as high as $200 per barrel in the next two years as the growth in supply lags growth in demand (see article: Goldman's Murti Says Oil `Likely' to Reach $150-$200).  I am one of the most bullish people that I know when it comes to oil and natural gas, but the meteoric rise that we have seen in the prices of both lately have even shocked me.  Fortunately, my personal portfolio is aligned to take advantaqge of this trend.  I bought all sorts of E&P companies, drillers, oil services, CANROYs, energy infrastructure plays, etc... in part because I strongly believe that the price of oil will steadily rise over the next several years, but also as a hedge to protect my family in case it does.  Rather than cringing every time I drop a C Note to fill up my family's SUV, I now smile (though I am definitely replacing it with something smaller when its lease is up in February).

Anyhow, I want to take this opportunity to talk about two of my favorite oil-related plays.  I have decided to hold off until tomorrow or the next day to talk about the first one because I have traded it within the last 10 days so per Fool rules I am not allowed to talk about it yet.  The other one is fair game though.  It is Penn West Energy Trust (PWE).  Here's my original short write-up on the company that I did back in March:

"Huge dividend + valuable assets + hated sector = BUY

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"

Who would have know that my prediction of oil over $150 by 2012 would end up looking so conservative only two months later. PWE published its Q1 results last night.  I haven't had a chance to dive too deeply into them yet and the company will not hold its conference call until later this morning, but at first glance the results look outstanding.  They missed the one EPS estimate that Yahoo! has listed for them, but EPS is fairly meaningless with CANROYs.  I can't because I'm talking about it, but if the shares drop because of that this morning it would be an excellent time to gobble some up.  Cash flow is what matters with royalty trusts.  The company's fund flow per unit rose to $1.75 in Q1, a 40% increase over Q4!  The company's numerous acquisitions make this comparison a little skewed, but its cash flow per share is up 103% versus the same period a year ago.

Another very important metric when looking at CANROYs is their payout ratio.  This basically means how much of the money that is coming in is needed to cover the dividend that they pay.  During the first quarter, PWE's payout ratio was below 60%.  That means that they can easily cover their 13% dividend and use the leftover cash to pay down debt and make acquisitions.  The company has stated that the dividend will remain at this level through July.  While they could raise it, it's so high now that this level is fine with me.  I actually like that management is so conservative.  Get that debt level down.

I wish that I had more time, but I'm got to run right now.  My wife and I are headed to her 20-week ultrasound.  Hopefully we will be able to tell if she is having a boy or a girl.  Any bets?  I'm sure that I'll have more to say about PWE later.


Long child #2 and PWE 

3 Comments – Post Your Own

#1) On May 07, 2008 at 8:41 AM, chk999longonly (98.21) wrote:

In retrospect I should have bought the fear after the Halloween Massacre. I was watching it, but didn't get around to pulling the trigger. I snoozed and I loozed.

Congrats on kid #2! 

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#2) On May 07, 2008 at 11:10 AM, TMFDeej (98.34) wrote:

Thanks chk999longonly.

For anyone who is interested, it's a boy ;).


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#3) On May 13, 2008 at 3:47 PM, pensione2 (< 20) wrote:

I also like PWE and agree that it is a good investment.  What are your thoughts on HTE... another CANROY?

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