The market sucks, but oil and gas royalty trusts, along with their junior counterparts, have a weapon in their arsenal others may lack: cash.
Mark Bridges, an analyst at CIBC World Markets, wrote in a note to clients on Tuesday:
We believe that the current market sell-off has presented a rare opportunity for producers to create value through share buybacks. Why spend capital to add reserves at $20.00 per barrel of oil equivalent when a producer can simply use this capital to buy its own stock back at $10.00/boe?
When the energy market bottomed out a decade ago, producers lacked stacks of dough. But now they are flush with cash, and energy prices are still high enough for them to turn a profit. But with debt and equity markets closed for business, oil and gas companies have to start “living within cash flow,” Mr. Bridges wrote.
Because most companies didn’t go on a drunken spending spree as commodity prices climbed higher this summer, they now have a cushion to soften the market’s punches.
The analyst said:
While maintaining a strong balance sheet and without increasing leverage, the list of candidates we feel could create the most value by redirecting capex dollars to initiate share buybacks include: ARC Energy Trust (OTCPK:AETUF), Enerplus Resources Fund (ERF), Pengrowth Energy Trust (PGH), Penn West Energy Trust (PWE), Vermilion Energy Trust (VETMF.PK), and Zargon Energy Trust (OTCPK:ZARFF). A slew of juniors also made the cut, including: Anderson Energy Ltd. [TSX:AXL], Celtic Exploration Ltd. [TSX:CLT], Crew Energy Inc. (OTCPK:CWEGF), Galleon Energy Inc. (OTC:GLNYF), Highpine Oil & Gas Ltd. (OTC:HPNOF), Orleans Energy Ltd. (OTCPK:OEXFF), Paramount Resources, Ltd., ProspEx Resources Ltd. (OTC:PSPXF), TUSK Energy Corp. (OTC:TSGYF) and Welton Energy Corp. (OTC:WLEYF).