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Penn West's Growth is about to Explode



August 28, 2010 – Comments (2) | RELATED TICKERS: PWE

As a long time shareholder of Canada's largest royalty trust Penn West (PWE) I have suffered through the highs and lows of the company.  I initially picked up shares after the "Halloween Massacre" when Canada decided to pull the plug on CANROYs favored tax status.  The uncertainty that this move created caused stocks in this sector to fall off of a cliff.  Seeing that this was a company with valuable reserves that had been oversold I pounced on the opportunity and added shares hand over fist.

At first, the move appeared to work out fantastically as I collected a double digit dividend yield and the company's stock soared as oil headed into the triple digits.   Of course, we all know what happened after that...the credit crunch, oil imploded, etc...

I held onto most of my PWE shares through that entire mess.  It's stock has recovered substantially over the past year, but I still believe that once again it is significantly undervalued.  The uncertainty that the company's switch from a boring CANROY that pays a high dividend to a normal corporation that rewards investors with a combination of growth and dividends is holding the company's stock back.

Investors still don't know what level the company's current 9% dividend will drop to and when the change will happen.  If I had to make an educated guess at this point, I'd say that PWE will lower its dividend to around 5% at around the beginning of 2011.

As I mentioned, at that time PWE will attempt to kick its growth into high gear.  The change is already underway, yet Mr. Market doesn't seem to realize all of the fantastic moves that Penn West has made lately.  The company has been bringing in large Asian investors to establish joint ventures to rapidly develop its non-core assets.

Several months ago the company entered into a joint venture with a Chinese Sovereign Wealth fund, to develop its oil sands assets.  

Penn West Energy Trust and China Investment Corporation Announce Closing of Previously Announced Joint Venture and Equity Financing

The move brought in $747 million in cash to Penn West plus a commitment to invest over $300 million in the development of the oil sands assets for something (oil sands) I essentially had assigned zero value in my evaluation of the company.

Flash forward to last week and Penn West received another major investment in a non-core asset, this time from the Japanese.  

Penn West Energy Trust Announces Strategic Joint Venture With Mitsubishi Corporation

Mitsubishi Corporation is paying Penn West $250 million in cash plus funding the first $600 million in development costs in exchange for a 50% interest in the company's shale gas assets.

Once again the company turned water into wine and received hundreds of millions of dollars in cash plus the potential for significant future growth that it doesn't even have to pay to develop in exchange for something that I hadn't assigned much, if any value to in my assessment of it.

PWE can not use this huge pile of cash to pay down debt and to develop its prime oil assets in Western Canada.

I've got to run to catch a flight home from vacation, but I was so excited about these moves that I wanted to write a quick blog post on the subject.

For more information on these moves, check out the great article that I came across the other day over at GuruFocus:

Penn West Energy – Surprising Production And Reserve Growth On The Horizon


2 Comments – Post Your Own

#1) On August 29, 2010 at 3:35 AM, walt373 (99.88) wrote:

PWE can not use this huge pile of cash to pay down debt and to develop its prime oil assets in Western Canada.

I'm assuming you meant "now" instead of "not"

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#2) On August 29, 2010 at 12:12 PM, TMFDeej (97.71) wrote:

Oops, that was quite a typo wasn't it, Walt ;).  You are absolutely correct.  Spell check doesn't catch typos like that.  It's amazing how one little letter can change the entire meaning of a sentence.

Penn West can NOW use this huge pile of cash to do all sorts of shareholder-friendly things.


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