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

This is why we need to maintain high oil prices: Spur on the little guy to find more, and spur further development with alternative energy.

Energy, Oil & Gas Energy, oil, production

Gas prices are pushing our government to do something rash.  Folks who are already feeling the crunch from poor credit management to declining equity in housing to fear of job loss and wage reduction are barking for congress to “do something” about gas prices.  It’s understandable.

However, a witch hunt to blame high prices on everything from price gouging at the local level to unreasonably high profits at the national level to speculation on wall street is shaping up to do us more harm than good.

The only thing that will reign in speculation is supply outweighing demand.  If oil storage levels start to increase instead of decrease, all the speculation in the world can not keep crude prices elevated to these current levels.

Futures trading is taking the rap for higher oil prices, and if our government doesn’t back off, the futures trading will move overseas where commodities regulation is nearly nonexistent.

In fact, it’s already happening.  On Tuesday the Dubai Gold and Commodities Exchange will start trading West Texas Intermediate and Brent crudes under the tickers DWTI and DBRC and they’ll trade from 8:30 a.m. to 11:30 p.m. local Dubai time.

One of the major benefits to opening this location up to crude is the proximity to vast portions of the worlds oil supply. The other is the move away from irrational government oversight bent on manipulating a world market for oil.

“Speculators create liquidity and help make efficient markets and any attempt to interrupt the free workings of a market would be dangerous as it would hinder the operation of a free market and create market inefficiencies,” says Mark O’Byrne, a director at Gold and Silver Investments Ltd. in Dublin, Ireland.

Regulators should be wary of unnecessary intervention in financial markets, including commodity markets, with increasing competition from financial markets internationally such as Shanghai and Dubai, he said.

“It would be wise not to kill the goose of an efficient market that lays the golden egg of an efficient economy,” he said. -Source

Unwise market regulation by the United States will only push trading activity further away leaving the U.S. government even less influential than they already are.

Energy, Investing commodities, futures trading, oil, speculation