PENN WEST PETROLEUM $18.34 (Toronto symbol PWT; Shares outstanding: 466.9 million; Market cap: $8.5 billion; TSINetwork Rating: Extra Risk; Dividend yield: 5.9%) is one of North America’s largest oil and gas producers. The company produces an average of 156,107 barrels of oil equivalent per day (weighted 63% to oil and 37% to natural gas).
In the three months ended June 30, 2011, cash flow per share rose 7.1%, to $0.85 from $0.62, mostly due to higher oil and gas prices.
The company owns 50% of the huge Cordoba Embayment shale-gas project in B.C. Japan’s Mitsubishi Corp. owns 30%, state-owned Korea Gas Corp. owns 5%, and four other Japanese companies own 3.75% each. Penn West’s partners are spending a total of $850 million to earn their stakes.
In response to the federal government’s income-trust tax, Penn West converted from a trust to a corporation on January 1, 2011. However, it has $7.0 billion of tax pools that it is using to offset the new tax. That’s letting it maintain its $1.08-a-share annual payout, which yields 5.9%. As well, the payout is now a dividend, and eligible for the dividend tax credit if you hold your shares outside of an RRSP.
Penn West’s $2.8 billion of long-term debt is a reasonable 32.9% of its market cap. As well, its debt is down from $3.5 billion at the start of 2010.
The company has identified over 10,000 potential drilling sites on its properties, so it has lots of room to boost production. Penn West trades at 5.6 times its forecast 2011 cash flow of $3.30 per share.
Penn West is still a buy.
ARC RESOURCES $24.30 (Toronto symbol ARX; Shares outstanding: 264.2 million; Market cap: $7.2 billion; TSINetwork Rating: Speculative; Dividend yield: 4.9%; www.arcresources.com [1]) produces oil and gas in western Canada. Its average daily production of 82,367 barrels of oil equivalent is weighted 63% to gas and 37% to oil.
In the three months ended June 30, 2011, ARC’s cash flow per share rose 21.7%, to $0.73 from $0.60. That’s because the company raised its production. It also benefited from higher oil prices.
ARC converted from an trust to a corporation on January 1, 2011, in response to Ottawa’s new tax. However, it has $2.2 billion of tax pools that it is using to offset the tax. That’s letting it maintain its $0.10 monthly payout (it now yields 4.9%).
The company’s debt is $577.1 million, or a low 8.0% of its market cap. ARC trades at 8.1 times its forecast 2011 cash flow of $2.99 a share. It is spending $625 million on exploration and development this year, up 5.8% from 2010. It has identified 8,000 potential drilling sites.
ARC Resources is still a buy.