Penn West Energy Trust plans conversion to corporation by end of 2012

By Lauren Krugel, The Canadian Press

CALGARY - Penn West Energy Trust (TSX: PWT-UN.TO) expects to convert into a corporation sometime in 2012, the firm's chief executive officer told unitholders Tuesday.

Federal rules that would tax income trusts at a rate similar to corporations are set to come into effect January 2011.

"Prior to the end of 2012, we will convert. You will probably see us convert some time between the end of 2011 and the end of 2012," said Bill Andrew, CEO and director of North America's largest conventional oil and natural gas producing trust.

Any hope that Ottawa might change course on the controversial changes - first announced in late 2006 - is "faint at best," Andrew said.

Through its existing tax credits and tax pools, Penn West will be able to "absorb" the tax and maintain distributions after 2011.

However, trusts take a hit if they convert after the end of 2012, "and it becomes very very punitive for the company to change after that date," Andrew said.

Penn West has had to knock down its distributions twice so far in 2009, first from 34 cents to 23 cents per unit at the end of January, and then again to 15 cents in April.

"Our feeling was that if the gas price had held, we would have had a chance at the 23 cents, but with the gas price going to where it is today ... the board made a decision," Andrew said.

Spot Alberta natural gas prices have fallen to below $3 per 1,000 cubic feet, versus $11 during the same week of 2008.

"We believe it's just part of good financial management. We're not going to risk the company. We're not going to go into debt to pay distributions," Andrew said.

Penn West has made a number of acquisitions over the past few years.

It bought Vault Energy Trust for $380 million in September 2007, followed by its $3.6-billion purchase of Canetic Resources Trust a month later.

In May 2008 it struck a deal to buy Endev Energy Inc. for $170 million and in March of this year, bought Reece Energy Exploration Corp. for $92 million.

"The last 18 months, we've basically gone from a condition where we were going through a merger to the position where we were going through a market turmoil that we haven't seen in 50 years," said president and chief operating officer Murray Nunns.

"We went through merger pain, not unexpectedly. We grabbed ourselves by our socks in October-November and said 'how are we going to perform at the level we want to be able to perform at?"'

Nunns said Penn West aims to have 3,000 drilling locations across Western Canada by the end of next year.

"It's an inventory that will have repeatable, scalable plays. They have to be big plays. At 180,000 barrels a day you don't get away with the small stuff. You need big building blocks," he told shareholders.

Last month, Penn West reported a net loss of $98 million, or 25 cents per unit, during the quarter ended March 31, reversing a year-earlier profit of $78 million, or 22 cents per unit.

Quarterly revenue fell by nearly a third, slipping 31 per cent to $781 million from $1.14 billion in 2008.

Penn West units closed at $14.95, down five cents, at the Toronto Stock Exchange.