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CALGARY - The management of Penn West Energy Trust (TSX:PWT.UN) is defending the decision to keep distributions steady and hedge nearly half its oil and gas production, saying that a conservative approach is prudent given volatility in commodity markets.

When asked by an individual investor on a conference call Friday why the trust would not hike its monthly distribution above 34 cents as a means to boost its unit price, chief executive Bill Andrews said it would be more prudent to pay down debt.

He said that higher distributions "probably would jump your stock, but it would reduce our ability to pay down debt and it would have long-term implications for the company."

"So we felt, as management, as a board, that prudent management was to leave the distribution at 34 cents per unit per month, which is still quite a healthy return for investors."

At that level, Penn West's annual payout rate is $4.06 per unit, giving it a yield of about 13.5 per cent based on Friday's market price at the Toronto Stock Exchange.

Penn West said Thursday it took an $837 million non-cash charge related to its risk management activities. Many other energy companies have reported similar hedging losses in their second-quarter results over the past few weeks.

Investors on the conference call criticized Penn West's strategy of hedging 40 per cent of its oil and gas production, but Andrews maintained that entering into those contracts is important to the trust's long-term health.

"We use it to protect a capital program. We use it to protect acquisitions," Andrews said.

"We also use it as a bit of a smoothing tool, where we'll engage in calendar hedges and smooth out prices over the year rather than go through the quarter-over-quarter volatility."

The hedging, sells specific amounts of production at pre-determined rates at various times in the future, are of negative value if the market price is higher at the time the contracts are marked-to-market.

Andrews noted that even over the past few weeks, the hedging losses have been reduced substantially because of a recent selloff in commodity prices on the spot market.

"Our natural gas hedges have gone from being under water to being above the board right now," Andrews said.

Ensuring stable revenues from oil and gas production is also important for Penn West's acquisition activities, as they often involve taking on the takeover targets' debt, Andrews said.

"I've seen too many companies take the risk and fall under the thumb of too much debt and not be around. And we were just not prepared to do that," he said.

Last fall Penn West merged with Canetic Resources Trust in a stock-swap deal worth $4.9 billion - including debt - creating the one of Canada's largest energy trusts with an enterprise value of about $15 billion.

It continued its acquisitions last month, closing a $170 million deal to take over Endev Energy Inc. (TSX:ENE).

On Thursday, Penn West said its second quarter net loss grew to $323, or 86 cents per unit, from a net loss of $186 million, or 77 cents per unit, a year earlier, due to the hedging loss.

On Thursday, Penn West reported revenues of $1.3 billion, up from $608 million last year, while funds flow were a record $753 million, up 131 per cent over the second quarter of 2007 when funds flow totalled $326 million.

Production averaged 190,515 barrels per day in the second quarter, up from 126,599 barrels in the same quarter last year.

Penn West units were off 33 cents to $30.20 in midday trading on the Toronto Stock Exchange.