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Old 09-24-2007, 03:25 PM   #1
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Hep me, hep me, please!

So my Canadian royalty trust PWI* is being purchased by a middle eastern company. I need a replacement stock. I'm thinking a replacement oil trust or something closely related. Suggestions? I don't like too much leverage with these trusts.

* This one is an absolute befuddler to me. Why would a company owned by persons who can pump oil for probably less than $10/barrel want non-middle east oil costing out significantly higher. Diversity as an answer just doesn't make sense to me at such a huge premium.

PrimeWest Picked Up By UAE - Forbes.com
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Old 09-24-2007, 03:36 PM   #2
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No opinion on oil trusts, but how about PVR or its competitor whose name escapes me at the moment?

I suppose that those who know a lot about oil would be potentially better than the market at valuing the trust?
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Old 09-24-2007, 03:41 PM   #3
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Congrats Greg. I own Penn West-PWE, also a quality trust. All these Canadian trusts jumped today, in anticipation of more buyout offers I guess.

As regards the buyers motivation, who knows. But there are angles that I can think of. It won't be long at all before OPEC owns the only conventional production in the world capable of being increased. Talk abut the cat-bird seat! Always before their attempts to throttle back on production to pull up prices were met with increases out of the North Sea or other non-Opec sources. And it will be not jsut OPEC but the Middle Eatern Muslim core of OPEC with this control.

So they may do a better job of enforcing quotas. Nice for Abu-Dhabi to have an oil and gas producer outside of that system that can freely sell into world markets at very high prices.

Ha
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Old 09-24-2007, 03:59 PM   #4
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Ha:

Just glanced at PWE. It appears that quite a bit of the dividend is return of capital. Earnings were $.89; distributions $3.84. Pretty steep spread?


PWE: Summary for PENN WEST ENERGY TRU - Yahoo! Finance
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Old 09-24-2007, 04:13 PM   #5
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Here are highlights from 2006 annual:

2005 % change
FINANCIAL

Gross revenues
$ 2,100.9 $ 1,919.0 9
Cash fl ow 1,176.8 1,184.6 (1)
Basic per unit 5.86 7.28 (20)
Diluted per unit 5.78 7.14 (19)
Net income 665.6 577.2 15
Basic per unit 3.32 3.55 (6)
Diluted per unit 3.27 3.48 (6)
Capital expenditures, net 577.9 456.7 27
Bank debt at period-end 1,285.0 542.0 137
Distributions paid 781.8 270.9 189
Dividends paid $ – $ 17.5 –
OPERATIONS
Daily production
Natural gas (mmcf/day) 312.5 287.8 9
Light oil and NGL (bbls/day) 39,514 33,137 19
Conventional heavy oil (bbls/day) 20,776 18,705 11
Total production (boe/day) 112,369 99,807 13
Average sales price
Natural gas ($/mcf) $ 6.75 $ 8.68 (22)
Light oil and NGL ($/bbl) 65.02 62.59 4
Conventional heavy oil ($/bbl) 43.07 35.71 21
Netback per boe
Sales price $ 49.58 $ 52.50 (6)
Risk management 1.64 0.18 811
Net sales price 51.22 52.68 (3)
Royalties 9.10 9.74 (7)
Operating expenses 10.39 8.99 16
Transportation 0.60 0.62 (3)
Netback $ 31.13 $ 33.33 (7)
U n l e a s h i n g e n e r g y
06 numbers are on left, 05 next. Cash Flow was approximately equal to distributions plus capital expenditures. Much of this expenditure is development, not maintenance since they have an oil sands project in the Peace River Basin.

I am not sure what went into the Yahoo figures, or what if anything they might mean.

Ha
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Old 09-24-2007, 05:45 PM   #6
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Ha:

You soothed me with some numbers. I'll go dig up the annual report too so that I can be soothed by words. Maybe. Thanks, I like this one. I probably should buy quickly because now I'm starting to think broadly about commodities. Not good. I should just fill the hole.
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Old 09-24-2007, 09:17 PM   #7
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Watch the balance sheets carefully on the Cdn oil trusts because cash flow often does not cover capex + distributions + debt retirement. Also check 2Q07 results as there have been/will be some downside since '06 results for all O&G trusts:
1) Debt servicing costs could increase given the current environment on debt and result in decreased distributions.
2) Appreciation in the C$ in 2007 will have resulted in a significant squeeze on margins.
3) As NG hedges come off, NG prices will have deteriorated some and NG netbacks will have been squeezed even more.

Having said that, PWE is likely one of the better oil trusts.
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Old 09-24-2007, 09:52 PM   #8
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AltaRed:

HTE Any thoughts? Thanks.
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Old 09-24-2007, 10:10 PM   #9
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AltaRed:

HTE Any thoughts? Thanks.

Sorry, I don't have an opinion as I actually don't follow the trusts to any significant degree.

In the days before the Canadian government's decision on Oct 31 last year to tax the income trusts starting in 2011, I considered most O&G trusts (in particular) to be Ponzi schemes. They had easy access to cheap capital and often used new issues of units to partially fund distributions (to keep yield and thus unit prices) high! That has changed since obscenely cheap capital has dried up post-Oct 31, but that is why I caution y'all to scrutinize their balance sheets carefully for past sins.
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Old 09-24-2007, 10:47 PM   #10
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Originally Posted by AltaRed View Post
In the days before the Canadian government's decision on Oct 31 last year to tax the income trusts starting in 2011, I considered most O&G trusts (in particular) to be Ponzi schemes. They had easy access to cheap capital and often used new issues of units to partially fund distributions (to keep yield and thus unit prices) high! That has changed since obscenely cheap capital has dried up post-Oct 31, but that is why I caution y'all to scrutinize their balance sheets carefully for past sins.


I think this is a very reasonable caveat with these, or any other equity investments sold mainly for income. Warren Buffet warned about this with regard to electric utilities many years ago. Dividends out one door, borrowings and dividend re-investment in another-less taxes due of course. Same thing applies in spades to many MLPs and REITs.

I have only owned PWE for a month or so- bought it in the downturn last month. There is no long history as a trust, as it has only been a trust for a short while. Their stated plan is to cover distributions and "maintenance capital spending" on an average basis with cash flow from operations. More long term additions that will ramp up future production for an extended time to be funded out of dividend re-investment and bank borrowings.

I feel that it is not ideal, but not bad. This investment will sink or swim based on the price of the commodities involved, since IMO they have the right kind of long life assets that are well suited to tertiary production.

They have in fact been quite successful with CO2 injection; and they have a promising oil sands project underway and in production.

And, the public already ran when the government taxation edict came down. Various good things could happen on the demand for the security side, and even additional bad news regarding taxation etc. should have lost some of its power.

For me it is a small investment, but provides a significant hunk of cash income, and I think the principle value is more likely to grow than shrink, and very unlikely to suffer massive setbacks.

Below is their financing discussion from the 2006 AR.

Ha


We strive to fund both distributions and capital programs from cash fl ow. We budget our capital programs at approximately 40-50 percent of forecast cash fl ow. We believe that proceeds from the Distribution Re-investment and Optional Purchase Plan should be used to fund capital expenditures of a longer-term nature. Over the medium term, additional borrowings and equity issues may be required from time to time to fund a portion of our distributions or maintain or increase our productive capacity. On a longer-term basis, adjustments to the level of distributions and/or capital expenditures to maintain or increase our productive capacity may be required based on forecast levels of distributable cash from operations and capital efficiency.
Productive capacity maintenance is generally the amount required in a period for an enterprise to maintain its ability to generate future cash flow from operating activities at a constant level. As commodity prices can be volatile, we define our productive capacity as production on a barrel of oil equivalent basis. Short-term variations in production levels are often experienced in our business. A quantifiable measure for these short-term variations is not objectively quantifiable or verifiable due to various factors including the inability to distinguish natural production declines from the effect of production additions from capital and optimization programs, and the effect of temporary production interruptions. As a result, the adjustment for productive capacity maintenance in our calculation of distributable cash from operations is our actual capital expenditures during the period excluding the cost of any acquisitions or proceeds of any dispositions. We
believe that our current capital programs will be sufficient to maintain our productive capacity in the medium-term and set our hurdle rates for evaluating potential development and optimization projects accordingly.
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Old 09-25-2007, 01:10 PM   #11
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Ha said:
For me it is a small investment, but provides a significant hunk of cash income, and I think the principle value is more likely to grow than shrink, and very unlikely to suffer massive setbacks.

I bought my PWI about a year ago for essentially the same reasons. I always worry about the negative stuff first. I like domestic companies. But I worry that XOM might get kicked out of Venezuela or COP from Russia , or contracts renegotiated, etc, etc. Canada is pretty safe. They may jiggle tax laws a bit in ways I don't like and unexpectedly, but not so much that I'm wiped out in the process. But with these trusts, I have my money directly and as purely as possible invested in a commodity I like right now. And I like the primary focus on "payout" rather than expansion of reserves or growth. Those seem to be lower priorities inside their mix of values. It has to be with the size of the monthly payments. That's different from a fair number of other companies--and adds a slightly different type of diversity to my stock mix.
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Old 09-25-2007, 02:39 PM   #12
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This thread has been helpful in sending me back to look carefully at some of PWE's filings. I hadn't really done this before I bought- I saw that Bruce Berkowitz owned it as a major part of his rather concentrated portfolio, and resolved to have a look. Then the sector crashed along with much of the market in August, so I just went ahead, thinking I might add more later, or lower if that should happen. As it turns out, it has jumped up a bit.

Like I said, absent big financial warning signs, I think price of commodity and amount, quality and type of reserves are key drivers in these trusts. The Canadian Trusts are different from US royalty trusts which have also been around 25 years or so, in that none of the older US trusts do any exploration, or buy land or leases while the Canadian ones do. So in actual fact, the US trust is a liquidating vehicle by design. After long ownership in several of these, I can see that the reserves in the good ones are very conservatively stated. Just a like a good frugal cook can keep getting soup from an old bone, these trusts-SJT, PBT, and others keep getting hydrocarbons out of the ground long after one might think that was about played out. The trouble is that it takes a while to get sorted out what is quality and what is promotion. When I was first going into the area a little more than 20 years ago, several good sized and highly popular trusts had huge write downs to their reserves, essentially wiping them out over night. Not sure but I think one was Horizon, out of Houston. So I was very conservative, and when it seemed that a trust was trading at 1.5or so it's SEC 10% value of reserves, I sold it. Well most of what I sold have been like the Volkswagens full of clowns at a circus. Those clowns just keep coming and coming!

Anyway, back to PWE. The balance sheet is pristine, at least by E&P standards. Less than 1/3 of capitalization is borrowings. The trust seems to be managed to use bank borrowings as a swing factor in balancing uses and sources of cash. In each year of trust history, uses and sources of cash were kept in strict balance, so that there was no net change in cash on hand. Dividend re-investment is a steady buy not large source of cash, and dilution. It pales compared to dilution in US corporations due to management options exercise. Then borrowings are either increased modestly, or some debt is retired to bring uses/sources into balance.

Add this to what appear to me to be good diversified resources and a good land base, I think this is likely a keeper.

Ha
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Old 09-25-2007, 06:21 PM   #13
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Congrats! Those were some nice gains yesterday, sadly I was left out of that one. Oh well, beers on you!

If you wanna ride a crazy rollercoaster with a portion of your jackpot, take a look at another Canadian company out of Quebec called Timminco. TIM on the TSX. They have a few products, but the main excitement is around their sales of solar grade silicon. It's special silicon used to make solar panels, and supposedly there's a big shortage of it in the world. Volume is good so it's a liquid stock and it's not unusual for it to move up or down 20% some days, but mostly it's in a strong uptrend.
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Old 09-25-2007, 06:45 PM   #14
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COSWF (cos.un) Canadian Oil Sands Trust. I'm now thinking about splitting my PWI money into 1/2 COSWF (hoping for some accumulated appreciation) and half PWE or HTE. I'm currently at the outside limit on total number of stocks but . . . . Any one own this one? Thoughts?

http://www.cos-trust.com/files/inves...port_FINAL.pdf
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Old 09-27-2007, 09:29 AM   #15
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I've put in a limit order on PWE. I'm hoping for a small dip over the next week or two. In addition, I'll take my gains portion from PWI and put that into an initial, small position in Canadian Oil Sands (COS-UN.TO). This will by my purer 'Canadian TIPS bond-like thingie.' It pays out about 6% from extracting oil from tar sands (the interest portion); I expect over time that oil will rise in price (inflation?) and this should contribute to a rise in the stock/unit price. To my mind, COS is a more moderate version of PWE, with larger reserves and a safer pay out/interest rate. I rate it BBB+

Thanks everyone.

Moody greg.
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Old 09-27-2007, 10:31 AM   #16
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COSWF (cos.un) Canadian Oil Sands Trust. . . . . Any one own this one? Thoughts?
I have owned this one for 5 years. It has a good track record and has been more fiscally responsible than a lot of other income trusts, partly because Imperial Oil (XOM sub) owns 25% of Syncrude and imposes fiscal discipline. It does have a lot of reserves but will be somewhat sensitive to increasing operating costs, and in particular the price of nat gas feedstock. Expect margins to be squeezed some when nat gas returns (presumably) to higher commodity prices. Don't think that will impact distributions but may slow debt repayment.

One could speculate that Alberta's latest royalty review could also impact COS because the operation is now in the 25% net royalty regime and any increase in royalty (royalty report recommends an increase to 33%) would squeeze margins considerably. May or may not impact distributions should that occur. Would recommend running your own calculations on this based on latest quarterly earnings.

The single biggest risk with COS is that it is a one trick pony. A major disaster, e.g massive fire, at its processing facility would devastate unit share prices at least temporarily while production is reduced/down. As long as you know that going in......
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Old 09-27-2007, 02:08 PM   #17
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AltaRed:

Thanks. I'm fairly comfortable with this outfit. I owned Suncor (SU) for a year or so and sold because it doubled, thinking it got ahead of itself. My mistake because it's more than doubled again since then. I prefer the larger 5% divi with COS. And, yes, I know they extract their oil with nat gas and costs are currently running just shy of $25/barrel for this process. Drops in world wide oil prices impact COS and SU hard.

Maybe they'll start extracting oil with wind mill farm electricity at some future point. That would be a nice jackpot for me--maybe. I own shares in a couple of those income trusts. Canada energy and natural resource stocks have all worked out well for me so far. In a couple of years, I'll rethink the income trust tax situation and royalty percentages. It's just not a consideration yet.
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