Penn West Energy Trust (NYSE:PWE) is converting to a corporation early in 2011 due to the imposition of a new tax in Canada. The company is preparing for its new identity with more capital to grow organic production and reserves over the next few years.
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Penn West Energy estimates that its average daily production will total between 164,000 and 172,000 barrels of oil equivalent (BOE) per day in 2010. In 2011, this production will increase to between 172,000 and 177,000 BOE per day.
The company reported proved reserves of 497 million BOE as of the end of 2009, of which approximately 69% was oil. Penn West Energy estimates that $800 million in capital is needed to keep production flat, and the company anticipates $200 to $400 million from organic growth going forward.
In 2007, the Canadian government levied a new tax on Specified Investment Flow Through (SIFT) entities to go into effect in 2011. The new tax applies to Penn West Energy because the company is organized as a SIFT, and as a result Penn West Energy is converting to a conventional corporation early in 2011.
Penn West Energy has properties in Western Canada located in many different plays. One of Penn West Energy's most active areas is in the Cardium trend in Alberta, Canada, where the company plans to put 30% of its capital budget in 2011. Penn West Energy currently produces 25,000 BOE per day from this area and has 650,000 net acres under lease here.
Recent wells for Penn West Energy have been very productive. The company reported two wells recently, each with initial production test rates above 2,000 BOE per day. These wells were not contiguous to each other and therefore indicate the potential of the entire play.
Other companies active in the Cardium play include Conoco Phillips (NYSE:COP), which has extensive lease holdings obtained mostly through its purchase of Burlington Resources in 2006.
In Manitoba, Penn West Energy is developing the Amaranth play. Wells here cost only $1.4 million and yield from 100,000 to 150,000 BOE during the life of the well. Production from Amaranth wells averages a recycle ratio of 3.5 when oil trades at $75/barrel.
Penn West Energy announced in September 2010 that the company was cutting its monthly distribution from $0.15 to $0.09 per unit. Despite this reduction in payout, the stock has a 6% yield. Many energy trusts in Canada have high yields. These include Pengrowth Energy Trust (NYSE:PGH) with a yield of 7.5% and Baytex Energy Trust (NYSE:BTE) with a yield of 6%. Investors should research these trusts to verify that the distributions are sustainable before buying any of the stocks.
The Bottom Line
Penn West Energy is preparing for its new life as a corporation as the company increases its capital budget to invest to grow production and reserves. (For more stock analysis, check out Top Canadian Dividend Stocks.)
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