Followup to our Monday report as Paramount issues 2008 Financials. Excellent way to play the natural gas sector with Net Asset Value of $10.63
Paramount Energy Trust (PMT.UN $3.00)
Paramount issued their year end financials last night and provided 2009 guidance. This company is beyond the realm of a microcap as its a mid tier natural gas producer but its good diversification for us. The financials were very impressive given the fact natural gas is trading at lows not seen for years. In particular:
1) They dropped their monthly distribution from $0.07 to $0.05 but at current share price levels, it still yields 20% annually. It would appear given forward hedge positions they can maintain this level for all of 2009. Providing income and an opportunity to play a rebound in gas prices or increased merger/acquisition activity in the oilpatch this summer.
2) This company's drilling and exploration team is top notch and likely one of the best in the business. In 2008 they achieved a 98% success rate on drilling 93 gas wells (77 net). In the 4th quarter, they drilled 24 wells with 100% success rate. Hitting 98% success on a dozen or two wells is impressive, but on 93 wells that is a huge accomplishment.
3) The company's senior management and finance group could give lessons to Wall Street bankers on how to properly run a company. The decisions these guys are making in balancing their distributions, their capital spending, and their hedge positions, is also top notch. At the first sign of economic instability last fall they made immediate cuts to capital and overall budgets. Since that time they have slashed the 2009 capital spending in 1/2 to about $65 million for 2009 but should still be able to replace (with about 3% decline) 2009 production with new reserves from a winter drill program which has been underway.
4) Natural gas prices are currently low near $4 per Mcfe but just over 50% of their production is hedged at $7.74 and further price management is in place to the end of March 2011 at $8.09 - which is equivalent to almost 1/2 their annual production at current levels. The company was smart enough this past summer to take full advantage of record high oil and gas prices. A perfectly timed moved when you look at the chart of natural gas over the past year.
5) Paramount has one of the most extensive inventories of undeveloped land in the energy trust sector relative to its production and reserves base - 3.8 million acres with 73% net interest. In addition, they have accumulated 420,000 acres of oil sands leases which over time, may hold significant value.
6) The company paid down $51 million in debt during 2008 and while levels are still moderately high, their asset base is very strong, the bulk of any debt is not due for a few years, and their cashflow and hedging strategies ensure debt can be easily serviced during this period.
7) The company is able to provide high field netbacks because of their extensive infrastructure and close proximity to market. In addition, they have a large inventory of low cost drilling opportunities and also several areas that could provide high impact drill results when they field its necessary.
The net present values of future net revenues ("NPV") for Paramount's , before taxes using McDaniel forecast prices:
5% discounted is $1.6 Billion or $14.53/share 0% discount is $2.1 Billion or $18.86/share
NET asset value at 5% discount is $10.63
All of this combines to make for one very well run company. One I believe will eventually surface (if it isn't already) on the radar of much larger corporations looking for acquisition targets in the beaten down natural gas sector. The natural gas reserves, land inventory, human resource talent, cashflow, and beaten down share price, make this an appealing target for any companies who feel the future is strong for natural gas. Even without this, its a great way to play the natural gas market.