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

In an effort to throw out some information on the oil and gas industry, I thought I’d write up a quick on on pumping units.

Pumping units provided the linear motion to the production string required to produce the liquid emulsion that is made up of water, crude oil and natural gas, among other elements.  Other common names for pumping units are beam pumps, sucker rod pumps (SRP), pump jacks, horse head pumps, and nodding donkeys.

Pump jacks are commonly referred to by their model, which is fairly common between manufacturers.  For instance, a 16-53-30 pumping unit is smaller than a 57-76-54 unit.  The model number is denoted by the rated torque of the reducer, the maximum rod capacity, and the maximum stroke length.

So the 16-53-30 unit will support 16,000 in-lbs of torque put out by the reducer, pull 5,300 lbs worth of rods, and have a stroke length of 30 inches.

-Source

Obviously, the deeper the well, the more rods you’ll need in the well bore, requiring a larger pumping unit to pull the weight.

Some major manufacturers of pump jacks are Lufkin Industries, Bethlehem, Parkersburg, Cabot, and Rigmaster.

Overall, a pumping unit is made up of several major components.  The samson post holds the walking beam with what’s called the saddle bearing.  A pitman arm connects the rear end of the walking beam to the reduction gear box crank, which is driven by the prime mover, or engine/motor.  The horses head attaches to the opposite end of the walking beam, to which the bridle cables attach.  The shape of the horses head ensures that the bridle cables move in a linear motion, even though the walking beam is rotating.

There are more exotic variants of the pumping unit, such as air-balanced units, but this description should provide the basic concept.

Additional Resources

Lufkin Pumping Units

Oil & Gas oilfield equipment, pump jacks, pumping units

Last Friday OPEC announced a cut of 1.5 million barrels of daily crude oil production as part of an effort to stabilize crude oil prices.  Evidently the commodity did not react as expected, shedding more than 7% more after the news.

It seems that the stability of the global economy is trumping anything OPEC can do to prop up the price of crude.  There is still a lot of money leaving the energy markets, either by force or lack of confidence.

Unfortunately, with every down day in the crude market, the foresight of alternative energy comes more into question. Everyone with a vested interest in developing alternative energy is starting to question the security of the decision to steer to wind, solar and other alternative energy sources.

As the price of gasoline slides, efforts from the likes of GM with the Chevy Volt seem to carry less of a return.

I think in the long run crude oil prices will start moving up again.  It’s just a matter of how long the alternative plays can ride out the dip.

Energy, Oil & Gas commodities, crude oil, OPEC