Reduced Payout A Sign Of Good Management

May 24th, 2009 – Comment

Hi Lou, What’s your thoughts going forward with Penn West  (PWT.UN) …they’ve dropped their dividend for the month of April.  Could that be an indication for trouble ahead? Colleen Hi Colleen, Penn West Energy Trust ( PWT.UN TSX) did reduce their cash distribution in April to $0.15 per unit and they have maintained that level for […]


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penn

Hi Lou,

What’s your thoughts going forward with Penn West  (PWT.UN) …they’ve dropped their dividend for the month of April.  Could that be an indication for trouble ahead?

Colleen

Hi Colleen,

Penn West Energy Trust ( PWT.UN TSX) did reduce their cash distribution in April to $0.15 per unit and they have maintained that level for the month of May 2009.

Penn West is Canada’s largest conventional energy trust and as we know the price of oil and natural gas are off substantially from their highs of a year ago.

I would say that the reduction of the cash payout is more of reflection of  prudent management than trouble ahead. The distributions were $0.34 cents through 2007 and 2008.

But in the current environment it would have been reckless to maintain such a high cash drain when the company’s income was in retreat. The distributions were lowered to $0.23 for the first three months of 2009 and were further cut to $0.15 which at the current price of the units represents a  yield of 13.10%. You don’t rake in a 13.1% yield without risk.

Click to enlarge

Click to enlarge

The company recently reported a Q1 loss of $0.25/unit and forecast their 2009 cap ex budget at the low end of a $600M – $825M range.

The chart indicates resistance at $15 and support at $12.50. PWT.UN needs to build a base and hold onto support to make a case for a further advance.  The 50 day moving average has turned up and is providing some support at well. In addition the downtrend that started last year has been broken.

The fate of  Penn West and the entire energy sector is dependent on commodity prices. Recent US dollar weakness has helped to lift energy prices and now we need to see if world demand will increase to contribute to the cause. With  Penn West you have a solid management team, a large land base and existing production  to weather the current storm plus you get paid fairly well to wait it out.

Happy Capitalism!

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