Penn West Petroleum Ltd. (NYSE:PWE)

CAPS Rating: 4 out of 5

The Company's direct and indirect subsidiaries and partnerships are in the business of acquiring, developing, exploiting and holding interests in petroleum and natural gas properties and assets related thereto.

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Player Avatar TMFDeej (99.46) Submitted: 3/12/2008 6:21:58 AM : Outperform Start Price: $20.73 PWE Score: +7.98

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. 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.

Deej
Long PWE

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Member Avatar jeffloun (81.65) Submitted: 3/27/2008 7:24:11 PM
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"huge sustainable dividend for the next four years"I have to question this part, what makes you think it is sustainable? They don't actually make $4.08 eps as of their latest results but they are paying it out in dividends so far... that is a bit scary, if you've watched income trust shares much, you know it is a steep share price drop the day they cut their payouts...

Member Avatar TMFDeej (99.46) Submitted: 3/28/2008 9:22:24 PM
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Hi Jeff. Thanks for the comment. When evaluating a CANROY to see if the dividend is safe, one should not look at the earnings number, but rather the cash flow and payout ratio. PWE has more than enough cash flow to easily cover its current dividend level. It is payout ratio is less than 70% and the price of oil and natural gas has risen significantly over the past quarter. Furthermore, PWE has never cut its dividend since it converted into a CANROY in June of 2005, that's 34 consecutive increased or stable payments. I personally feel VERY comfortable that PWE will be able to at least maintain, if not increase its current distribution level until the new Canadian tax laws go into effect in 2011. When that time arrives, PWE will have to decide what it wants to do with its valuable assets. If it chooses it could use its tax pool, which is more than twice the level of its peers, to continue its dividend payments for at least another year if it wanted to.Deej

Member Avatar Inthegray (< 20) Submitted: 5/16/2008 4:02:03 PM
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Another difference ( and it's a big one) between Canadian Trusts and U.S. based trusts is that the Canadian trusts can add to their reserves and the U. S based ones cannot.

Member Avatar rodby (79.16) Submitted: 6/10/2008 8:53:25 AM
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I own this stock and I thought about the tax issues. I think they are the biggest reason the price has hung around $32.50 for the past 2 years.But here's how I figure it. Let us say, for grins, that the market is heavily discounting all future cash flow because the tax issues are unclear, but that eventually, the company is taxed like a regular corporation.So, assuming the price is the sum of discounted cash flows we get: $32.50 = PV future free cash flow x (1 - tax rate) , and assume a tax rate of 35%SO $32.50 = PV future pretax free cash flow x (1 - .35) which means$32.50/.65 = $50 = PV future pretax free cash flow => about what the price would be w/o the tax issuesNow assume that oil prices have doubled since the CANROY tax issues surfaced (I think that is reasonable and may end up being conservative), and assume they stay high (I can make a strong case for oil prices staying high for years even if there is plenty of oil in the ground).If the above is true, then eventually the stock price should rise above its current $33, possibly dramatically, as the CANROY tax issues become clearer, and in the meantime, I get paid 12.00% to wait.While there are other issues, like new province taxes. etc. I think the risk/reward is pretty favorable.What do you think?

Member Avatar Bochephus (< 20) Submitted: 9/4/2008 5:53:22 AM
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Rod, I'm a bit confused by your calculation.Don't you mean $32.5 x .65 (as you had started with in your explanation)? That is $21, a bit of a difference to the result of $50.Just curious, has anyone tried to index this with the movements in oil prices over the last 1 years? In your view, would this be a sensible way to analyze performance of this company? (ie Is there anything more to this stock other than expectation of rising oil prices?)Does anyone have any thoughts on the contemplated disposal of the 10 packages of "non-core" land? And how is it that land producing 16,000 boe/day is non-core to the business? Isn't this exactly the kind of asset the CANROY is after? Seems to me that this is a bit of bad timing given the recent reduction in oil prices (albeit everyone is likely convinced this is only a temporary trend). Would there be anyway to determine the book value of this non-core land from public info (i.e. without being a part of the auction process / entering the dataroom for the deal)? I would like to understand why exactly this is non-core.Lastly, any thoughts out there on the justification of the 66x EPS multiple?

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