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Matt Clarke
Matt Clarke

There is still cheap oil out there: Penn West Energy (PWE)

July 26, 2007 | About:

Canadian royalty trusts are typically commodity companies that have historically received special tax status in Canada, and could therefore pay out a large percentage of their earnings to shareholders with little to no tax implications. On Halloween night, of 2006, the Prime Minister of Canada announced that in 2011, he would start taxing the dividends of Canadian royalty trust distributions at the regular corporate tax rate- around 40%. The next day, shares of Canadian royalty trusts plummeted around 25%, and haven’t fully recovered yet.

According to yahoo finance, oil stocks have an average price/book ratio of about 3. Many of the Canadian oil royalty trusts have price/book ratios of between 1 and 2, due to the Prime Minister’s announcement and subsequent price decline. Not only do you get them cheaper than other oil stocks, but you also get huge dividends, typically 10%-12% due to the depressed stock prices. The dividends will decrease in 2011 if the new taxes get put in to law, but that doesn’t change the fact the price/book ratios of these commodities is significantly lower than average. Many of the prices of these oil royalty trusts have increased since the beginning of this year, but they are still low by industry standards. Although I wouldn’t bet on it, as you can imagine, the Canadian royalty trusts are collectively fighting the proposed 2011 tax hike, so there is a chance that the dividends may never be affected.

My favorite Canadian oil trust is Penn West Energy (PWE). I like this company because they seem to have the best management, and they also have their hand in the Peace River oil sands project. A few companies (including Penn West) have devised a way to extract oil from sand in northern and central Canada. If successful, this could provide a significant free cash flow in the future.

Bruce Berkowitz has 7.41% of his portfolio devoted to Penn West Energy. That is a large bet. He bought shares last year between $28.29 and $41.99. The current price is $31.75 and the yield is 12.31%, so it may still be a bargain. David Dreman also owns shares as well.

Everyone knows that we live in an uncertain world with the war on terrorism, and many people postulating that we could hit peak oil. Buying Canadian oil companies could provide a great chance to for you to protect your self, or even financially benefit from such a crisis. Yet, if it turns out that we never hit an oil crisis, you will still have a good stock on your hands that is yielding above 12% and is selling a product that the president has declared that we are addicted to.

For those reasons, if you agree, and want to hedge against an oil crisis with some oil stocks, Canadian oil trusts such as Penn West Energy may be worth looking in to.

For full disclose, the author, Matt Clarke, does indeed own shares of PWE. You can email the author at [email protected].

About the author:

Matt Clarke
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.8/5 (20 votes)


David Pinsen
David Pinsen - 10 years ago    Report SPAM
I like BPT, which is yielding about 11.3% and happens to be a Magic Formula stock as well.
Tomdkriti - 10 years ago    Report SPAM
good reporting on can. stocks.

Joestudz - 10 years ago    Report SPAM

In looking at the PWE website I got the impression that if the new tax goes in in 2011 it will be 3 years later before it would apply to PWE (due to carry forward deductions)
JJINVEST - 10 years ago    Report SPAM
N. Edward Murray. How much of PWE does he own? What is his role in PWE's birth? Bruce Berkowitze regards this guy highly.

I know how to look up SEC Filings for insiders etc. for US stocks. How do I have that info for PWE or any Canadian stocks? thanks!
Mattray253 - 10 years ago    Report SPAM
It is more difficult to find info on canadian stocks. I did a little research, and it turns out that he served as Chairman of Penn West Energy Trust until May 27, 2005. I get the impression that PWE is a sister company to CNQ, where he is currently vice chairman.

I don't know exactly how much of Penn West he owns now, but I did read that it is one of his three largest holdings, along with Canadian Natural Resouces and Ensign Energy.

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