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.

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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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.

Yesterday I was able to pick up some more Provident Energy (PVX: chart, web, Y!) shares for $11.70.

Today the stock was down $0.14 to $11.77 on average volume. I suspect that Tuesdays trading (remember Monday is a holiday) will reveal another push towards $13.  Memorial Day is the official start of the driving season, and even if driving is down this summer, oil will maintain levels above $110 for the majority of the hot months.  This will leave the electrical power generation companies turning to natural gas ($natgas: chart) vs. heavy oil.

Additionally, the hurricane center predicted that this will be another active season with as many as 5 major hurricanes predicted.

The future is bright for natural gas this summer.

Over a week ago Provident Energy (PVX: chart, web, Y!) released their 2008 first quarter results.  After venturing out of town on business for a week, I’m finally starting to catch up on the market events, which, by industry standards are now old news.

A few highlights from the report:

• Funds flow from operations in the Canadian Oil and Gas Production and Midstream business units, as well as oil and gas production in the U.S. was up 107% to $180 million or $0.71 per unit.
• Distributions for Q1 totaled $0.36 per unit, equating to a payout ratio of 59%, down from 91% in Q1 2007.
• Production increased to 52,300 boed, up 61% from Q1 2007 due to acquisitions and internal development.
• Canadian oil and gas production averaged 27,600 boed in Q1 ‘08 as compared to 24,300 boed in Q1 ‘07, an increase of 13%.
• Production remains fairly balanced at 51% natural gas and 49% crude oil and NGL (natural gas liquids).
• The May distribution will continue to be $0.12 CDN payable on June 13th.

Corner Office Thoughts

This company continues to impress me.  We’re starting to see the results of well tendered acquisitions in 2007 as an effort to replace reserves and increase production and drilling potential.

It’s good to see the payout ratio drop as I thought it would, but I had no idea it would drop by 32%.  The effect is that this leaves good opportunity for one of two moves: increase the monthly distribution, or continue to invest in acquisitions to replace reserves and increase production.  Personally I’d like to see the distribution left alone, and the added net cash flow used to further production.

As of today’s writing, Provident stock stands at $11.94 per share.  This time last year I’d consider taking some off the table and buying back on the dips below $11.  However, with the increase in production (funds flow from operations doubled) and the lowered payout ratio, Provident is starting to look cheap, even at these levels.

I’m looking to buy more PVX in small chunks, but only after we see a retrace of the price action over the last couple days.  The stock has seen a solid run up, spurred on by the Q1 report, and I think there may be some profit taking in the works over the next week.  An order placed at $11.50 per share is reasonable.

I bought more Provident Energy (PVX: chart, web, Y!) today, adding another 50 shares to my holdings. Crude oil ($wtic: chart) spiked on the news that Benazir Bhutto was assassinated in Pakistan, and natural gas ($natgas: chart) is holding its own above $7 going into the cold weather season.

I’m playing the trend. I’m in the stock for the dividend, but if the price rises to $13 I’ll definitely take some off the table. 30% price appreciation is too much to pass up, especially when you see it coming. The fundamentals of the company remain intact, and the only other thing that is weighing on the canroys is increasing production costs and the lingering Canadian tax policy.

My Provident Energy Trust (PVX: chart, web, Y!) has been on the slide since the beginning of November. I can’t figure out why.

The only conclusion I can come to is that it’s attributed to end of year tax selling, but that theory only makes marginal sense. After all, PVX is continuing its CDN$0.12 monthly dividend, and fundamentally, I don’t see why they’d drop the distribution any time soon. Crude oil ($wtic: chart) is still North of $90 per barrel, and natural gas ($natgas: chart) is holding above $7 per MCF.

So it’s tough to tell why the stock has dropped nearly 30% since its high of $13.55 back in the first part of November.

However, I extended the chart out a few years today, and noticed a pattern. The stock price has dropped significantly in between late October and late November nearly every year since the inception in 2002. To further exploit the pattern, over the past three years, the stock starts its way upward after the beginning of the year and peaks somewhere around July.

I’m not sure how I’m going to play this. I’ve held PVX for its healthy monthly dividend, and haven’t really considered trading it based on the chart. However, it would be tough to miss out on a 30% gain that I can see coming…

What do you think? Would you play this trend?

Yesterday Provident Energy (PVX: chart, web, Y!) entered an agreement to buy out a privately held company with oil assets in southeast Saskatchewan for $79 million in shares.

The short end of this is that PVX is spending money to increase reserves, and add to their daily production. In fact, they’ll add 1,300 barrels per day of production, nearly all of which is crude. Provident’s proved plus probable reserves are estimated at 3.6 million barrels of oil.

“This acquisition provides excellent strategic and economic value to Provident, improving the quality and supporting the sustainability of our existing southeast Saskatchewan assets,” said Provident President and Chief Executive Officer Tom Buchanan. -Source

A side benefit to this is that 17,900 net acres of undeveloped land are part of the deal, and 100 gross drilling opportunities wait in the wings. To top it all off, the operating costs of the existing wells are under $5.00 per barrel.

This is a sweetheart deal for Provident in terms of reserves and increased production, and if you’re conservative, this is a 4 year payout on a $79 million in stock.

Not bad. Provident lost $0.33 per share today on the news combined with retreating crude prices… If I weren’t so overweight in the stock already, it would be an attractive time to pick some more up.

This smaller acquisition is on the heels of the Capital Energy Resources deal back in May.

I’m reading the Wall Street Journal this morning, and I came across a provocative article concerning the declining value of the US dollar versus the Canadian loonie.

Evidently, those in the “exotic dance” industry in northern U.S. states are seeing a workforce shortage. Not because morals and values are increasing, but because Canadian currency is increasing in value.

“The owner of five strip clubs in Detroit and Windsor, Ontario, says American dancers are heading to Canada to earn the strengthened Canadian currency, and Canadian customers are heading to Detroit because their dollars go further there. He’s fighting back by advertising more in the U.S. and offering free limo service to get Detroit men to visit his Windsor clubs.” -Source

I’ve never been one to partake in the services of the exotic dance industry, but I do think it’s interesting that the workforce is following the money.

In addition, I’m interested to see what effect the increased value of the loonie will have on Canadian taxes, and more importantly, how it will affect the royalty trust tax rate.

One of the big advantages of the royalty trusts is the spread between the Canadian and U.S. currency. For a long time, the U.S. dollar has out-valued the Canadian counterpart, and as such, my PVX dividend is valued accordingly.

Now that the tables are starting to turn, the Canadian Royalty Trusts may be more enticing, regardless of the tax situation.