» Will the PrimeWest Energy Trust energize your portfolio? (NYSE: PWI)

Will the PrimeWest Energy Trust energize your portfolio? (NYSE: PWI)

January 23, 2007 on 9:13 am | In Long Term Picks |

BUY PWI under $18.80

SELL PWI at $30 or when PWI’s estimated reserve life declines 10% or more

The PrimeWest Energy Trust is a Canadian oil and gas trust which is actively managed to generate monthly cash distributions for unit holders. The Trust’s operations are focused in western Canada, Montana, North Dakota, and Wyoming. The trust produces approximately 68% natural gas and 32% crude oil.

Through the distribution of monthly dividends, PrimeWest has a yield of about 13.5%. PWI’s stock is trading near a 52-week low and is over 45% below its 52-week high of $32.90. Wall Street Mayhem believes that PWI has a compelling valuation at this level and that PWI’s share price should move up while investors also capitalize on the hefty dividend.

Although all oil and gas trusts have performed poorly as the price of oil and natural gas has declined, Canadian oil and gas trusts have been decimated in the last five months. In October of 2006, the Canadian Minister of Finance announced a proposal that will increase taxes on Canadian oil and gas trusts. Starting in 2011, Canadian oil and gas trusts will be taxed at the same rate as regular Canadian corporations. These taxes will significantly decrease the amount of profit that will be distributed to unit holders of Canadian trusts. However, this proposal was unpopular with conservative Canadian politicians and the deadline is still four years away. It is possible that the political landscape in Canada could change significantly in four years which could serve to reduce or eliminate the newly proposed taxes for oil and gas trusts.

Assuming that the new taxes actually go into effect in 2011, PrimeWest still has a compelling valuation under $19. For the past five months PrimeWest and other Canadian trusts have declined much faster than the underlying energy prices which drive their profits. PrimeWest is down about 35% since September of 2006. During that same time frame the price of crude oil dropped from about $65 a barrel, to the current price of about $52 a barrel (25% decrease) and natural gas prices were roughly flat.

PrimeWest has an excellent track record of boosting revenues, reducing costs, and increasing reserves. For the past five years average daily production of natural gas has grown every year. The natural gas production increases are impressive, but more importantly natural gas reserves have grown in each of the last five years as well. The estimated reserve life for PWI has grown from 10 years in 2001, to a current estimate of over 13 years. Since PrimeWest is actively drilling and expanding their proven reserves, they are in essence a similar investment to an integrated oil company, but PWI pays a much higher dividend.

It is impressive that PrimeWest is able to increase production, increase reserves, and still pay a consistent dividend over 10%. Although most of the Canadian oil and gas trusts appear to be good values at this point, PrimeWest is the highest quality investment in this sector due to their track record and the growing life expectancy of their reserves.

PrimeWest is great addition to any long term portfolio because it gives protection against a jump in energy prices. If energy prices decline, then investors have what amounts to a 13% per year cushion against a potential decline in the share price of PWI. If energy prices spike again, PWI shares should soar. Although energy prices have moderated in recent months, demand for oil and natural gas continues to grow.

In September of 2006 China’s oil imports were 24% higher than they were in September of 2005. China’s economy is showing no signs of slowing down and China’s demand for oil will continue to grow for the foreseeable future. Therefore, Wall Street Mayhem believes that every long term portfolio should have at least some exposure to energy related investments.

The combination of the decline in oil prices and the proposed change in Canadian tax laws have made Candian oil and gas trusts an unpopular investment right now, but Wall Street Mayhem believes that these two factors have combined to create an excellent buying opportunity for the long term investor.

40 Comments »

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PWE is a good Canadian oil and gas trust as well. It is also way off its highs and it has a nice juicy dividend.

Comment by Tom — January 23, 2007 #
Does anyone like DOM? Another oil and gas trust, but not a Canadian oil and gas trust. It is down more than 50% in the last 6 months. It looks cheap, but over on the Yahoo message board there is a lot of chatter about falling reserve levels. Does anyone know the status of the reserves for DOM?

Comment by GaryP — January 23, 2007 #
I like how PWI continues to grow its reserves, but I’d rather invest in an oil and gas trust that focuses on oil, not natural gas. Does anyone konw of a good oil and gas trust with over a 10% dividend, increasing reserves and a focus on oil? Thanks.

Comment by cancan — January 23, 2007 #
Not my cup of tea, I’ve heard the story before about the great dividends you receive for these oil and gas trusts, but they are just too boring for my tastes. Come on Wall Street Mayhem, give us some more short term picks!

Comment by roger — January 23, 2007 #
Gotta love that dividend. I also really like how these Canadian trusts seem to be universally hated right now. As a contrarian at heart, I really like this group right now. I think it runs to 25 and my 13% dividend becomes a 25% dividend considering my purchase price.

Comment by paully — January 23, 2007 #
if i recall correctly, pwi’s monthly dividend was 36cents per share at the start of 2006 but has been reduced to 25 cents per share by the end of 2006.

Comment by will — January 23, 2007 #
Will, It is true that the monthly dividend has gone down, but it was not because of production decreases. It went down because of declining oil and natural gas prices combined with hedging activity and increased drilling expenses. The drilling sector has cooled off now and these expenses should go down. The 13.5% mentioned above keeps the payout at current levels for the next 12 months. Not bad considering that this payout level should be at least stable unless natural gas prices drop.

Comment by paully — January 23, 2007 #
Good article on why Canada should drop the proposed tax on oil and gas trusts: http://www.canada.com/national.....a2b6d77684

Comment by cancan — January 24, 2007 #
I’m in, PWI is a great hedge for me. I have largely tech and growth so I need something to hedge against energy prices. PWI fits the bill.

Comment by Alex — January 28, 2007 #
Nice move so far. I think all of the Canadian oil & gas trusts are undervalued right now. Unless oil & gas prices drop significantly, these trusts will do well for the rest of the year.

Comment by Jerry — January 31, 2007 #
More of the talking heads are starting to give wild $100 a barrel oil predictions again. If there is any truth to these predictions then PWI will soar. Even if it doesn’t soar, the divident is great. If it does take off, we could be sitting on a stock that pays a yearly dividend that is 50% of our purchase price.

Comment by cancan — February 1, 2007 #
Penn West looks a lot better to me that Prime West. Excellent management. Dividend has never been cut, only increased. Huge land holdings that they can either sell or drill themselves. Oil an gas mix gives them more stability. Even if the tax structure change holds, this stock will appreciate from current levels. And a 13% cushion to sit on. Perfect counterpoint for my high techs.

Harper’s “I will never tax trusts” and subsequent reversal may have the same effect on his career as daddy Bush’s “Read my lips, no new taxes” had on his. But a lot quicker, since Canada is a parliamentary system. Especially since Flaherty’s phony numbers used to justify the switch just don’t fly. I think opposition MPs will end up exempting energy trusts from the change when the bill hits the floor, even if the bill passes.

Yes, I am long PWE.

Comment by Phil — February 2, 2007 #
Phil, I like what I see in PWE as well. I’m already long PWI, but I’ve looking to buy a few more of these trusts and PWE is looking good. The only thing that I don’t like about these is that if I own too much I find myselft rooting for higher oil prices.

Comment by Jerry — February 2, 2007 #
Jerry, I think of it more as a hedge. :)

Comment by Phil — February 2, 2007 #
One aspect to be considered with foreign stocks is the rate of exchange. When I bought PWE the C$ was at ~$0.87, now 3 cents less. The main two factors driving the exchange rate today are the price of crude oil and the interest rate differential. (Or the outlook for either) On a falling oil price you get a double whammy on Cdn energy trusts. Of course, when oil rises, the C$ tends to rise with it. If the US Fed were to raise interest rates, but not Canada, this will drive down the C$, but if the Fed were to lower rates but not Canada, the C$ will rise.

Comment by Phil — February 2, 2007 #
Phil, thanks for the info the Canadian exchange rates, but I still have a few questions. Since PWI and PWE both sell their oil and gas at international commodity rates (standardized by the US dollar), why does the Canadian exchange rate matter? If the Canadian exchage rate goes down don’t they just get more Canadian $ each time they sell the commodity?

Comment by Cancan — February 2, 2007 #
These canadian trusts are looking even better now that energy prices have started to creep back up. I like PWI and PWE, but does anybody know about one of these trusts that has 100% oil and no natural gas? (and a high dividend, proven reserves, and good management of course)

Comment by Siaxis — February 27, 2007 #
All of this sounds good but why is Morningstar recommending a sell on PWI?

Comment by j e taft — June 4, 2007 #
I bought PWI at 20.87 then it went down to 20.01 its back today to 20.30 will see. 14 % dvi isnt to bad in todays world

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