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Former Berkowitz Favorite Penn West Cuts Dividend – But I Have to Ask...Mr. Market Where is My Selloff ???

September 09, 2010 | About:
Canadian Value

CanadianValue

210 followers
Sometimes you can try and be a little too clever. For months I’ve been watching Penn West Energy Trust (PWE) knowing two things.

1) The company would be converting to a corporate structure before the end of 2010 which would result in a dividend cut

2) Moving some of that cash into drilling could significantly increase Penn West’s proven reserves

I think the company is a very good value at current prices and has a pretty limited amount of risk given their massive resource base. But I thought that when the news of the dividend cut came out that we could get a pretty sharp selloff after which I could add a larger position at even better prices.

Today we got what I had been waiting for.

“Commencing with Penn West's September distribution paid on October 15, 2010 to unitholders of record on September 30, 2010, Penn West will be reducing the current distribution of $0.15 per unit per month to $0.09 per unit per month.”

And of course the stock is …….up ???

Mr. Market never fails to surprise. Although the dividend cut is hardly a surprise I was certain that final confirmation of it would trigger quite a bit of selling from the last of the high yield investors who had been enjoying the juicy yield. I guess the yield even after the cut isn’t too shabby either though.

And that is what I like about Penn West going forward. The company still offers a very attractive yield (about 5.5% after the cut on the current stock price) and now also offers considerable reserve and production growth going forward for an extended period of time.

Perhaps Mr. Market was actually acting sensibly today as he may have noticed some excellent drilling results announced on some of Penn West’s large land base:

“A key area of focus for Penn West has been the large Cardium trend in central Alberta. Within this trend, Penn West's drilling efforts are rapidly evolving from a small platform of horizontal wells drilled prior to 2010 to large-scale, low-risk development in 2011. Penn West holds in excess of 650,000 acres on the main Cardium trend. Our current Cardium program focuses on the Willesden Green, West Pembina, and greater Pembina areas. Drilling results to-date have exceeded expectations. Two of our most recent wells, drilled approximately 70 kilometers apart, had initial test flow rates in excess of 2,000 bbls of light oil per day. One of these wells was in Willesden Green and delivered first month average production of 860 boe per day. Penn West believes these results are not confined to a specific part of the Cardium, but are indicative of opportunities across the trend. Our current inventory of approximately 3,000 locations and our growing experience in the use of horizontal technology provides us with confidence that we can consistently meet and/or exceed our previously published type curve expectations.

In the Waskada / Goodlands Amaranth play in southwest Manitoba, much like in the Cardium trend, our recent results have exceeded expectations. Recently we drilled and completed what we believe is a groundbreaking well in the area. After an innovative 40-stage fracture, this well has been put on production without artificial lift at a rate of approximately 200 boe per day. This significant well is producing at a level 2.0x - 2.5x our typical type curve for the area.

In addition to our success in the Cardium and Waskada / Goodlands, we are producing strong results in the emerging northern Alberta Carbonate trend. Our most recent wells in the area are providing average first month production of 200 - 300 boe per day. “

Penn West has 7 million acres of land in Western Canada which contains one of the largest oil basins in the world. Only 14% of the oil in this basin has been extracted to date and employing horizontal drilling is likely to allow Penn West to now double its proven reserves over the next few years. If oil prices continue to trend higher how much more of the oil under Penn West’s control will eventually become economical to extract ?

After years of Penn West not doing much with its large resource base it seems that CEO Nunns is waking this sleepy company up. First an oil sands partnership with Chinese investors, then a shale gas partnership with Japanese investors and now a plan to jump start light oil production growth.

I think this is a low risk way to lock down oil reserves at a bargain price. And as we wait for the reserve growth to arrive and for oil prices to increase there is a sizable dividend to enjoy. It reminds me of Petrobakken (PBN.to) which also pays a sizable dividend and has a clear runway for multiple years of production and reserve increases:

http://www.gurufocus.com/news.php?id=105574

I likely won’t chase the share price up from here, but will be adding on any drops.

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 3.2/5 (9 votes)

Comments

tbilon
Tbilon premium member - 4 years ago
The dividend cut has been priced in for quiet some time. In fact some of the trust conversions have resulted in increased valuations based on the cuts.

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