Provident Energy Trust: Income for Today and Tomorrow

Much has been written on the Canadian Oil and Gas Royalty Trusts in the last year or two. Much of what has been written was in regards to the taxation of the Trusts beginning in 2011. Generally, we believe this is overblown hype and has simply served to drive prices of the shares to extreme lows.

The price levels of all the Trusts have been beaten down not only because of the 2011 taxation issue, but also because of the sharp declines in crude oil and natural gas. We ask the question: how low does a Trust price have to fall and how high do the yields have to rise to make the risk/reward adequate to begin purchasing some of these Trusts?

We would argue that a Trust yielding 15-20% with a good history and a reasonable expectation of a future ability to maintain their monthly payouts represents a good long term (3-5 years or longer) portfolio holding.

We have recently been purchasing Provident Energy Trust (PVX). With the volitility in these issues, we find it beneficial to 'average in' our purchases and thus have bought 5 times in the last month at an average yield of near 20%. We chose PVX for more than just fundamental reasons. First it trades on the New York Stock Exchange, which gives us great liquidity when buying or selling, meaning we get a fair price. Secondly, PVX has options available on a major options exchange in the United States.

Our general reasoning on the purchase of Provident Energy Trust shares (PVX) is that while in the near future oil and gas prices may fall further, as the worldwide economy gets back on its feet, hopefully by late 2009, the fundamentals will justify much higher prices. Additionally while we are awaiting higher prices, we will be collecting a nice monthly dividend (even if it gets cut in half).

One last kicker is that we sell out of the money calls against our position which sweetens our returns nicely (of course the shares can get called away if the shares rise--but we can either buy the calls back in or repurchase the shares as the situation warrants).

Lastly, there is one overlooked variable in the case of Provident Energy and that is the fact that Provident has built a 'tax pool' that will allow it to avoid taxation until at least 2016. Most of the Canadian Royalty Trusts have been building these pools, but it is either not recognized or not understood---thus we get the extreme bargains in the share prices.

Much of the same reasoning as mentioned above can be used for Pengrowth (PGH) and Penn West Energy (PWE)--we simply have chosen Provident Energy (PVX) to execute our strategies.

Disclosure: Author holds a long position in PVX, no position in PGH or PWE

Comments

[User 179334:]

Can you explain more about the "built a 'tax pool' that will allow it to avoid taxation until at least 2016". How does this work. Thanks.

2008 Nov 06 07:06 AM

[beabaggage:]

Good article, also long PVX. Did not know about the tax pool til 2016, good point. This makes them a target for PGH or PWE and others who need more tax pool credits. AAV is another one with good tax pool. Own all and HTE too. also OGF.UN-TO, the Brompton fund that owns 5% of top 20 canroys paying .07 CN monthly, a great way to own these and diversify, managed by ManuLife/JH. VIP.UN-TO also in my basket, as is KYE which owns a little canroy. maybe I have too much portfolio in O&G but who cares, the divs every month from all these allow me to diversify into other areas that are cheap.

2008 Nov 06 08:38 AM

[gebby:]

all the stocks have the same chart. pwe, hgt etc.

2008 Nov 06 09:25 AM

[Tim McPartland:]

For those wondering about the tax pool--here is the link to the 2007 annual report where they discuss on page 41 the tax pool.

www.providentenergy.co...

2008 Nov 06 09:49 AM

[tomatden:]

Now is also a good time to buy because of the relatively strong USD. The long-term supply/demand fundamentals for the USD are not too hot, so a future weakening dollar will boost the future dividend for those of us in the US.

2008 Nov 06 10:33 AM

[oilsands:]

Thanks for the comments, Tim. On note: While the computer screen counter says page 41, it seems to be page 39 in the PVX report.
tomatden is spot on re the future of the US dollar and its effects re these Canadian energy trusts. I have owned Canadian royalty trusts for some years including all you have mentioned.

2008 Nov 06 11:12 AM

[User 171371:]

Own PVX, sold PWE ($34) and AAV ($14). Please take note the Canadian government said "anything that comes out of the ground belongs to all the people".

Will continue to use PVX for monthly income,at present levels it looks interesting.

2008 Nov 06 11:21 AM

[Tim McPartland:]

Thanks for the correction oilsands

2008 Nov 06 12:15 PM

[Greg Pinelli:]

Canadian Trusts..especially the oil/gas...PWE and PVX at the top of the list...are as close to true long term plays as an investor will find in highly volatile markets. The next twist on oil/nat gas prices will be that despite falling demand there will be persistently rising prices and shortages of the two fuels. Existing well depletion is far outstripping the 3-5% IEA projected just a couple of reports ago! It's likely closer to 9-12% (depending on which source or fields are being examined). Even 3-4% demand destruction leaves the world millions of barrels and billions of btu short.
Oilsands are certainly going to take an environmental hit..they are also largely unprofitable at today's spot....but the US MLPs (LINN and LGCY) and the Canadians discussed present superb value and returns that wait out the down cycle.

2008 Nov 06 03:59 PM

[January Thaw:]

Don't forget ERF...pretty good numbers - not so flashy but steady.

2008 Nov 06 06:17 PM

[svosavvy:]

nice article, refreshing, how about some color on the breitburn deal. I think they sold high, which is the way it's supposed to be done, nice. How about the risk management that has puts in place for <$62 oil. How about the death of coal because of obama, what else can the US burn to make electricity instead, oh yeah, nat gas. Long pvx, oilsands are languishing now, but, what happens when opec missteps in a reactionary tone to low prices, and cuts production massively. Hello domestic (north american) oil. If they cut div in half that still gives new money an impressive yield, and the old timers a better than average yield.

2008 Nov 07 01:01 AM

[NOWHEREMAN:]

The CanRoys are selling to the world in US dollars and converting same to the loonie which translates into lower production costs but higher earnings.

They have been hampered in recent years by the strong Canadian dollar which many times created problems because Oil is priced in dollars.

Granted that the effects of the strong dollar will reduce the payout to US holders, but it will also allow for higher payouts in the future. Hopefully the economic slowdown which is currently affecting Canada will force a reevaluation of the governments implementation date of its controversial Law.

PVX is the safest, IMHO.

2008 Nov 07 03:38 AM

[Loup-Garou:]

Great article. My thanks to everyone who posted comments.

They are lucid, reassuring, and useful.

People who like the Canroys come across as a decent bunch.

2008 Dec 02 06:33 PM

[Ames Tiedeman:]

Superb value. PVX and the other top 5.

2008 Dec 13 12:08 PM

[Ames Tiedeman:]

At this point one has to question the dividends. The values look compelling, but the dividends are not sustainable with oil at 40 or below. Caution is strongly advised.

Mar 02 06:17 PM