Thursday, May 20, 2010

Penn West Energy Trust 2

I am continuing my review of the stocks that I own for which I have received an annual report in 2009. As I mentioned yesterday, in 1998, I bought a stock called Maximum Energy Trust. Through mergers and acquisitions, it became Ultimate Energy Income Trust, then Petrofund Energy, then NCE Petrofund, then Penn West Energy Trust (TSX-PWT.UN). I think I have all the changes. According to Quicken, I have made a total return of 8% per year on my purchase.

The first thing I like to look at is the Insider Buying and Insider Selling reports. What I see for this company is Insider Selling to the tune of $2.8M. There is a very tiny bit of buying. All this selling occurred this year. The company has a Unit Trust Rights incentive plan, and when these rights invest, they seem mostly to be sold off. Although there are some exceptions, most of the insiders have far more Unit Trust Rights than Trust Units (or shares) in this company. I know that granting of options, rights etc was to align the management’s interest with the shareholders. I do not think this happens.

First of all, in valuing this company, looking at the P/E Ratio does not make much sense because it is all over the place. For example, because it is not expected to make much in earnings this year, I get a P/E of 285. The forward P/E ratio at 42 is better, but does not say much except earnings are not expected to be high in 2011 either. The Graham Price is not much better. This is based on earnings and book value and for 2007 it was $17.59, for 2008 was $39.63, for 2009 was $5.44. For 2010, I get $5.40 and for 2011, I get $14.00.

Since the Book Value not only goes up, it also goes down, the Price/Book Value Ratio also has problems, but this ratio is a bit more stable. The 10 year average is 1.54 and the 2010 P/B ratio is 1.08. The current ratio at 70% of the 10 year average shows a relatively good stock price. We also have problems with the dividend yield. The dividends tend to fluctuate with the price of oil. The current rate is 8.4% and the 5 year average is 11.9%.

When I check what analysts say about this company, a lot talk about cash flow, so let’s looks at the Price/Cash Flow Ratios. I track Cash Flow from Operations, and I get a 2009 P/CF of 5.6 and an estimated current P/CF 6.0. The 5 and 10 year averages for the P/CF is 5.9 and 5.6 respectively. So it looks like the current one is around the averages.

When I look at analysts’ recommendations, I find there are Strong Buy, Buy, Hold and Underperform recommendations. (See my site for information on analyst ratings.) The consensus recommendation is a Hold. Not much that is negative is said about this stock. Analysts like their resource assets.

The analysts with Hold recommendations mention that they feel that distributions will be cut when the company changes to a corporation. It is felt that buying after the company converts to a corporation might be better timing. This company has said they will pay the current distributions until August. They do not seem to say what the distribution will be after that. Analysts with Buy and Strong Buy recommendations really like the recent cash infusion from China Investment Corp. This will allow the company to pay off some of their debts and develop their assets.

As I said yesterday, I do not have much invested in this company. I will continue to hold what I have and I will continue to follow this company.

It is the largest conventional oil and natural gas producing trust in North America. They operate only in Alberta. Its web site is here Penn West. See my spreadsheet at pwt.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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