Pape Says Sell Energy Trust, Hold Gold
03/06/2007 12:00 am EST
Ticker symbols: PWE, GG
Gordon Pape, publisher of the Income Investor, has second thoughts about a once-popular Canadian energy trust but is sticking with a gold miner that has had mixed results lately.
Last Monday, Penn West Energy Trust (NYSE: PWE) released disappointing fourth-quarter and year-end results. Cash flow per unit came in at $1.23, well down from $2.03 in the same period of 2005. Net income decreased to $123 million (44c per unit) from $241 million ($1.48 per unit) a year ago. The company said the declines were mainly due to lower natural gas prices and higher depletion charges as a result of the Petrofund Energy Trust merger.
More disquieting than the financial statements was the reserves report. Penn West said that its proven plus probable reserves at year-end were 482.8 million barrels of oil equivalent (BOE). That was up from 357 million BOE the previous year, but the increase was due primarily to the acquisition of Petrofund.
Following release of the results, CIBC World Markets issued an updated research report in which the brokerage firm predicted a distribution cut to 31c per unit (from 34c currently) in the second quarter. CIBC has a 12- to 18-month target price of $38.25 for the shares. RBC Capital Markets was much less bullish, cutting their target to $31.25 (from $32). (Penn West traded at around $28 early Tuesday—Editor.)
My approach to income trusts in the light of the Canadian government’s proposed tax is to stick with only the very best. Penn West’s long-term outlook may be fine, but for now it does not rank in the top tier from my perspective. Therefore, I recommend exiting at this point.
The recent news from Goldcorp (NYSE: GG) has been mixed. On February 23 the company announced that while its production will be up in 2007 to 2.6 million ounces, it will fall short of its December forecast of 2.8 million ounces. However, Goldcorp also said that production costs, which had been projected at $150 an ounce, will come in lower than that. In the fourth quarter of fiscal 2006, production costs were $160 an ounce.
The company also said that reserves had risen dramatically. Proven and probable gold reserves are 39.8 million ounces, up 170% per cent from previously, while measured and indicated gold resources are 16.4 million ounces, about five times more than before. Acquisitions from Placer Dome and Glamis Gold accounted for much of the gain.
Earlier, Goldcorp announced it will restate its earnings going back to 2003 as a result of a ruling from the US Securities and Exchange Commission (SEC) on the accounting treatment of warrants. The biggest impact will be on first-quarter 2006 results, with a drop in earnings of $458 million.
The share price has been treading water for a while. (It changed hands north of $25 on Tuesday—Editor.) Retain existing positions, but don’t add more for now.