Energy Trusts at Risk of Distribution Cuts - Scotia Capital Analyst

by: FP Trading Desk

Oil and gas analysts popped out mixed messages on the trusts they cover this week – a buy to one warranted caution from another.

On the sunny side, Jeremy Kaliel, an analyst at Scotia Capital, expects the oil and gas trusts he covers to spit out a total return of 41%. Their holdings in the western Canadian sedimentary basin give them the chance to discover “the next big resource” – buckets of hydrocarbons hiding below the earth’s surface.

These companies have free cash flow, and tax incentives that motivate them to “leave no stone unturned.” New technology gives them the chance to “teach an old asset new tricks,” Mr. Kaliel wrote in a note Tuesday.

His favourites are Baytex Energy Trust (NYSE:BTE), Crescent Point Energy Trust (CPGCF.PK), and Daylight Resources Trust (OTC:DAYYF). The so-so names in Mr. Kaliel’s mind are ARC Energy Trust (OTCPK:AETUF), Harvest Energy Trust (HTE), Penn West Energy Trust (NYSE:PWE), Provident Energy Trust (PVX), and Vermilion Energy Trust (VETMF.PK). And the ugly ducklings are NAL Oil & Gas Trust (OTC:NOIGF), and Trilogy Energy Trust (OTC:TETFF).

And with that, we turn to Canaccord Adams’ thoughts on the royalty clan.

The note said:

We believe most of the energy trusts in our coverage universe will be at risk of cutting distributions should commodity prices remain at or below current levels. However, we remain confident that these trusts have the financial strength and flexibility to endure the current economic crisis.

Those with “minimal risk” of distribution cuts are NAL, Vermilion, and Enerplus Resources Fund (NYSE:ERF), all of which should please yield-oriented investors. Those looking for long-term potential growth – and are less phased by distribution cuts – should gravitate to Baytex and Crescent Point.

Daylight, NAL, and Enerplus have the lowest valuations right now, but Daylight has a greater risk of cutting distributions to shareholders, Canaccord said.

As for Harvest, its high debt levels are scary. ARC Energy Trust’s aggressive spending plans are also nerve-wracking. “[We] would advise caution on these names as we believe there is above average risk of a distribution cut in the near-term,” Canaccord said.