Parallel Energy trust is Eagle Energy’s twin in this new breed of trusts operating under US jurisdiction and funneling generous distributions back to Canadian investors. Unlike the 100% oil weighted Eagle Energy Trust, PLT.UN does not produce one drop of oil as it produces liquids rich natural gas. With a $0.90 distribution per share, PLT PLT-UN.TO 0.78 [+0.08] currently yields a generous 11% at current prices. However, given this bearish environment for natural gas prices, is the distribution sustainable? I believe it is!
First, before you turn your back in disgust to current natural gas prices, let’s take a look at the company’s property down south. PLT has a 59% interest in a property located in the West Panhandle field, Texas, part of one of the largest conventional gas fields in North America. The field was first discovered in 1918 and produces liquids rich natural gas with an average decline rate of 8% over the last 3 years. This is a nice decline rate as it means you need to drill just enough wells to replace 8% of your total production every year if you choose to maintain production at the same level.
Here’s where it gets interesting, PLT’s production is 67% in condensate and natural gas liquids leaving 33% in dry gas. Yes, it’s a “natural gas” weighted trust, but you need to keep in mind the liquids weighting where condensate fetches WTI pricing and NGLs fetch about 60-65% of WTI pricing leaving “only” 33% of production to be abused by falling prices thanks to the glut the US enjoys in natural gas.
Since the company is guiding for 4,600-4,800 in average production for 2012, let’s see how sustainable their model is using the following assumptions:
- 2012 capex: $16.5M
- 2012 average production 4,700 boed (67% liquids)
- WTI oil price of $92.50 covering condensate production
- $58 per boe for natural gas liquids
- Natural gas price at $4.20 /mcf
Please remember that this capex is growth oriented and not for maintaining current production at 2011’s projected exit rate of 4,350 boe/d. The company may choose to maintain current production instead of increasing it by 36% relative to 2011 levels which would require much lower expenditures. Furthermore, this model assumes PLT is entering 2012 with 4,700 boed in average production which is not true; expect 2012 results to be different as the company grows its production on a quarterly basis before reaching its targeted average production.
Based on the scenario above the company should be able to realize a cash flow netback of around $29/boe which is very good for a natural gas producer in this environment. However, the payout ratio will be around 70% with a sustainability ratio slightly above 105%. The model in theory is sustainable especially if the company decides to limit production growth at some point. The negative here is a debt of $61M on a $100M line of credit and that will not be paid from free cash flow as it is all taken up by capex + distributions. But with the recent announcement of a DRIP program starting in Q4-2011, a 50% participation level will funnel at least $17M back into the company which could be used to reduce the outstanding debt substantially bringing the current debt to CF ratio below 1.
While PLT lacks the “sex appeal” of Eagle Energy Trust’s oil production (which also boasts a much lower POR and no debt), it is still in a much better shape than many dividend paying oil and gas corporations in western Canada. Parallel Energy provides you with a long term exposure to natural gas prices while you get paid generously. Do keep in mind that the liquids are responsible for the bulk of PLT’s revenue and could be easily impacted by falling oil prices. For 2012, the company has hedged a decent amount of its production protecting the bulk of its cash flow. In theory, natural gas prices should recover as we get closer to starting up NG export terminals, would you hold till then?
Disclaimer: I currently own shares in PLT.UN. This article is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment, please do your own due diligence before taking an investment decision.
