A Royalty Trust You Can Trust

12/02/2008 12:00 pm EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of High Monthly Income, likes Canadian energy trust Penn West despite the continuing fall in energy prices.

We still advocate holding Penn West Energy Trust (NYSE: PWE) despite the recent sell-off in the shares, and the concomitant decline in oil and natural gas prices.

One of the reasons for our commitment is based on the trust’s commitment to pumping out its dividend despite the tough times in the oil and natural gas space. [Here are some] excerpts from Penn West’s [third-quarter] report, published September 30th:

“In the third quarter of 2008, Penn West generated funds flow of $662 million, an increase of 91% over the $346 million generated in the third quarter of 2007. The increased funds flow reflects the impact of strong crude oil prices and higher year-over-year production levels. We have maintained our cash distribution at 34 cents per unit per month since February 2006 and our Board recently approved this distribution level until at least January 2009. The current distribution level resulted in a payout ratio of 59% for the third quarter of 2008 and a 54% ratio for the first nine months of 2008. Penn West’s net income was just over $1 billion for the quarter, primarily due to unrealized hedging gains from our risk-management contracts.

“We have closely monitored the debt capital markets since mid-2007 and have been acting defensively since that time. Earlier in the year, we syndicated a three-year, $4-billion bank credit facility. Penn West had approximately $1.5 billion of unutilized credit capacity as of September 30, 2008, providing flexibility to continue the execution of our strategic and business plans for the foreseeable future.

“We invested $232 million into our asset base in the third quarter, bringing our total investment to $757 million (excluding corporate acquisitions) in the first nine months of 2008.  We continue to pursue a balanced approach towards near-term production additions with long-term reserve and production growth.”

We can see that PWE management is committed to paying out the distribution—i.e., dividend—payment of 34 cents per unit (share) at least through January 2009. That’s great news for us, as we shall continue collecting the income spun off by the trust.

Another thing is that PWE made a lot of money in the third quarter. The company’s net income of more than $1 billion for three months, which it attributed primarily to unrealized hedging gains from risk-management contracts, is exemplary. This speaks to how well the trust is managed in a very difficult climate for oil and natural gas.

Now, I am not happy with the way the share price has pulled back since we bought into the trust. (It closed at around $13 Monday—Editor.) But what we need to do right now, while we wait for the value of the trust to come back into favor, is concentrate on the company’s fundamentals.

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