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Someone thinks that oil is cheap at this level



November 12, 2008 – Comments (3) | RELATED TICKERS: PWE


While perusing the news this morning, the following article really jumped out at me:

China seen topping up government reserves with cheap crude

The Chinese government has been loading up on oil at this level.  It has used the astounding fall in the price of oil to fill its strategic reserve tanks, potentially giving it as much as a 100-million-barrel cushion by the end of the year that it will use to help smooth out future demand growth.  This amounts to approximately three months worth of oil.

China's crude oil imports surged a whopping 28.2% last month to 3.81 million barrels per day, its third highest daily rate ever recorded.  While information about its strategic reserves is kept secret by the government, China really does not have enough refinery capacity to process all of this crude oil.  This has lead many analysts to believe that it is hording the oil for future use.

Interesting news.  Now I don't know when the price of oil will hit bottom.  It is entirely possible that we will see $50/barrel oil at some point this year.  Having said this, the short-term fluctuations on the price of oil don't concern me very much.  The main oil play in my portfolio is an extremely conservative company, Penn West Energy (PWE).

This CANROY (Canadian Royal Trust) just reported stellar third quarter results this morning.  Since the price of oil and natural gas were much higher several months ago than they are today, the near-record cash flow doesn't interest me as much as how conservatively this company is being run.  It was penalized for this on the way up, but it will eventually be rewarded for it.

While other companies were raising their distributions, PWE kept its steady with a very conservative mid-50% payout ratio.

It has hedged a tremendous amount of its production at reasonable levels, it has entered into contracts to protect itself from any further deterioration in the Canadian dollar versus the U.S. dollar, it has been active in paying down its debt, it has great access to capital with the 3-year $4.0 billion credit facility that it added in January and the notes that it placed in the U.K. at the end of July it now has approximately $1.5 billion in unutilized credit capacity, and it is being very flexible with its capital expenditures budgeting anywhere from This $600 to $1 billion for 2009 depending on the outlook for energy prices.

Penn West's Board of Directors recently decided to keep its distribution level at $0.34 Canadian through January 2009.  At this rate, this is equivalent to a dividend of just over 20% in U.S. dollar terms.  Of course, this will eventually have to be cut if the price of oil collapses even further and the whole Canadian tax issue hangs over the head of all CANROYs, but I am more than content to hang onto this conservative, well-run company and collect a huge distribution while I wait for the inflation which I believe is inevitable finally arrives.


Long PWE

3 Comments – Post Your Own

#1) On November 12, 2008 at 11:24 AM, Gingerbreadman55 (26.48) wrote:

I'm with you Deej, except in HTE

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#2) On November 12, 2008 at 1:09 PM, sobodobo75 (29.07) wrote:

I like the yield, but the dividend is taxed as regular income as this is a royalty trust, correct?  Do you hold this in some sort of tax deferred account or in a regular trading account?

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#3) On November 12, 2008 at 1:25 PM, sobodobo75 (29.07) wrote:

Actually, I'm an idiot. Even if it's regular income, as long as that income isn't bumping you into another more costly tax bracket, that's still a 12-14% after-tax yield.  Wow, that's pretty stellar.  I guess that's why they call you the Deej.  

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