Trust earns skepticism
When something looks too good to be true, it almost always is, as anyone who bought units in PrimeWest Energy Trust knows.
The units had a posted trailing yield of 20 per cent before yesterday's announcement that distributions would be cut. The market was obviously pricing in some bad news because the units have underperformed their peers this year, falling 31 per cent. But given yesterday's 5-per-cent drop, it was not enough.
Assuming that the new payment schedule of 10 cents a month holds for the year, the implied yield at current prices is still about 20 per cent. Investors obviously don't think the distributions are sustainable. They have good reason to be skeptical.
PrimeWest has made some fairly bold bets this year, most notably by buying Cyprus Energy for $800-million, a very expensive acquisition made all the more risky by the fact that commodity prices were softening rapidly.
A couple of equity issues ensued, raising $165-million. Some of that was used to ease the debt from the balance sheet, some set aside for more acquisitions. The effect is dilution: Reserves per unit are down from the beginning of the year and debt is up. The company is selling assets to pay down its borrowings, but not at the most opportune time.
PrimeWest's distributions have held out reasonably well in the latter half of this year, largely because the company hedges a lot of production and had a cash surplus from which to draw. But conservatively assuming cash flow per unit of $1 for next year, distributions will be closer to 90 cents, less than half this year's. And given that about half that yield might be from hedging gains, the upside is limited at current prices. The downside isn't, especially considering PrimeWest's premium to peers. Even at an implied yield of 15 per cent, investors should be careful.
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