Penn West Energy Trust (PWE)

The company’s free cash flow is trending the wrong way. Not sure if there are seasonal factors affecting FCF but the company is well off historical ratios of revenue-to-cash-flow conversion. The company has begun emphasizing “funds flow,” which adds back asset retirement obligations and non-cash working capital, over OCF/FCF. Unless the company also pays “non-cash” distributions and capital expenditures, color me skeptical of this measure.

Operationally, the company experienced some setbacks with a worker death and a pipeline leak during the quarter. While I don’t think they are in danger of becoming the next BP (BP), these incidents, in conjunction with some of the issues they had last year (such as the Wildboy plant fire), suggest management needs to tighten the ship a little on operations.

With oil prices now in below $60, I am concerned about Penn West’s ability to maintain its current state. The board has already declared dividends to remain steady through year end but if PWE already had trouble sustaining distributions and capex from operations, management will have to address a 60% drop in energy prices combined and more expensive debt. If there’s any sizable Santa Claus rally, I may seriously consider selling my units. Otherwise, I look forward to their next earnings report.