Provident Energy (PVX: chart, web, Y!) released financials for Q1 this past Thursday, and noted that they would keep the distribution at $0.06 CDN for the coming month.

Some highlights for the quarter:

- Unitholder distributions in the first quarter of 2009 were $0.21 per unit resulting in a payout ratio of 65 percent, compared to the 70 percent payout in the first quarter of 2008 when Provident distributed $0.36 per unit.

- Provident maintained its financial flexibility during the first quarter with senior bank debt of $496 million (47 percent credit facility utilization), while total net debt was $749 million (including subordinated convertible debentures and net working capital), resulting in a net debt to trailing four quarters funds flow from continuing operations ratio of 1.6 times.

- Provident Midstream sold approximately 141,700 barrels per day (bpd) of natural gas liquids (NGL) in the first quarter of 2009, an increase of 4 percent from approximately 136,300 bpd in the first quarter of 2008 due primarily to the growing demand for condensate in the Redwater West business.

- Provident Midstream generated earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) of $70 million in the first quarter of 2009, down 8 percent from $76 million in the first quarter of 2008 due to lower NGL sale prices partially offset by lower feedstock prices, higher sales volumes and an $11 million realized gain from the commodity price risk management program.

- Provident Upstream produced approximately 24,600 barrels of oil equivalent per day (boed) in the first quarter of 2009, down 11 percent from 27,600 boed in the first quarter of 2008 due to naturally occurring production declines and the impact of the reduced 2009 capital program with spending focused on long term initiatives.

- Provident Upstream generated funds flow from operations of $23 million, down 68 percent from $71 million in the same quarter of 2008. This decline is due to lower production volumes and lower field operating netbacks (reflecting a substantial drop in oil and natural gas prices), partially offset by a $9 million realized gain from the commodity price risk management program.  -Source

On the downside, funds flow from operations was down 35% compared to Q1 of 2008.  Naturally, commodity prices have a lot to do with that, so it’s not necessarily indicative of faltering company strategy.

Corner Office Comments

I’m fairly pleased with the results of the first quarter operations, and I think natural gas prices, along with crude will start to strengthen into the summer, bolstering these numbers a bit more.

The payout ratio is starting to come back down a bit, which in this environment isn’t a bad thing.  The distribution cut is frustrating, but it’s one you’d have to expect when commodities are on the lamb.

The share price is starting to head back up hill, and I’ve started buying more shares below $6 to help average my overall cost down.  As the price continues to rise, I’ll sell off some shares in an effort to diversify out of the energy sector.

Investing, Royalty Trusts Provident Energy, PVX, Royalty Trusts

I picked up another handful of Provident Energy (PVX: chart, web, Y!) late yesterday afternoon.  I believe the stock is way oversold, and has considerable upside potential, despite the reduced distribution.

This was a move to not only capitalize on an oversold condition, but also average down on the stock.  Buying at $3.00 per share helped bring my average cost down below $9.00 per share.  I’ll continue to monitor the oil and gas sector for more potential opportunities.  Canadian royalty trusts have been beat into submission, but the fundamentals of the major players remain intact.

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Investing, Royalty Trusts Provident Energy, PVX

Last week Provident Energy Trust (PVX: chart, web, Y!) announced that while they had successfully closed the sale of their U.S. oil and gas business, they would also be cutting the monthly dividend to $0.09 Canadian, or about $0.07 USD.

Although that certainly smarts, I can’t say that I’m surprised.

Provident has traditionally been a very conservatively managed trust.  They look to increase their reserves with the smallest amount of risk (i.e. expanding production through infield drilling and acquiring proven reserves), and they really don’t take off any more than they can manage, and manage well.  A case in point was the divestiture of its equity interest in BreitBurn Energy Company L.P for a total sale of about $305 million USD.

Provident has been beaten down lately with the rest of the markets, commodities in particular.  As fast as oil prices rose, they fell even faster.  I suspect that the price action from most Canadian trusts came as a result of big money fleeing the market to increase liquidity, and money was pulled from even the most attractive places.  No stock is/was safe.

The good news behind all this is that fundamentally the trust looks fairly robust.  Funds flow from operations in Q3 were up 44% from the same quarter of last year.  Production from the Canadian side of the O&G business was up just slightly (~1%) from the same quarter year over year.

Interestingly, the payout ratio was down to 61% for the third quarter, as compared to 89% from Q3 last year.  For the nine months ended September 30, the POR was just 53% compared to 88% for the same period last year.

So why the dividend cut?

Just like any business in this economic climate, PVX is facing the same pressure economically as the mid-majors in the U.S.  The forecast for oil prices in the next 6 to 12 months is anyone’s guess, and while things were looking up as of the end of the third quarter, they aren’t so bright going into Q4, and I suspect the results from this quarter, reported next year, will be less than palatable.

Provident believes that capital spending must be aligned with prevailing economic conditions. To this end, the Board of Directors has adopted a conservative capital budget of $165 million. Provident has an extensive inventory of quality opportunities available for additional investment. Provident will review its capital program throughout 2009 to determine whether any combination of work program results, commodity prices, equity and debt market conditions or other material factors merit changes to the capital budget. -Source

It’s clear that Provident is getting a head start on the budgetary aspects of this downturn in the oil and gas industry, however I believe that they are savvy enough to capitalize on these bad times. In a lot of respects, they already have.

The company has a new development they’re calling the Pekisko play in Northwest Alberta, consisting of a 100% working interest in about 54,000 acres of undeveloped land.  What’s interesting about this is that that acreage is right next to existing company operations.  So they know the geology and they know the local reserves.

In fact, they drilled two horizontal exploratory wells that production tested more than 250 bpd.  Not bad, even for $50 oil.  In all, the reserves are estimated at 2 million barrels of proved plus probable oil based on these two offset wells.  In all the company has about 300 drilling locations in the play, so they’ll be busy for a while.

In all, I’m not really worried about my stake in PVX, sure the distribution cut is a bummer, but again I’m not surprised.  The potential that keeps presenting itself to the company is still attractive, and the fact that they capitalize on their opportunities is a sign of a well-run oil and gas company, regardless of the market or industry conditions.

I look for oil prices to hover between $40 and $60 for about the next six months or so, and then go up as the economic conditions strengthen.

Energy, Investing, Oil & Gas, Royalty Trusts Candadian Oil and Gas Trusts, dividends, DRIP's, oil, PVX