Energy Trusts at Risk of Distribution Cuts - Scotia Capital Analyst

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

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 (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.

Comments

[NOWHEREMAN:]

All oil companies paying relatively high yields are at risk of reducing their payouts. What else is new?

The Canadians are less at risk than others because of the big drop in the Loonie. It is much easier for a company like HTE to service its debt now that they have a positive cash flow from oil/oil products sold for dollars vs losing money when the loonie was at parity or higher.

HTE for all of its "scary" debt is the only one of the others mentioned above which has announced the open market buyback of both units and debt. Of course, I may be mistaken since I do not follow all of them.

This Kaliel that you quote, what sort of track record does he have? How have his recommendations panned out?

You neglected to mention his history so I do not have a clue whether to follow his advice or not. It would be nice to have this sort of info about all of the analysts whose articles you post excerpts from.

Ditto Adams, who at least has a caveat: ... "should commodity prices remain at or below current levels."

They also forgot to include PGH, which is building a Pilot plant which will use steam rather than NG to extract oil. This will mean a lot to them if it works since they are leveraged to NG.

Just an opinion from an unqualified former stockbroker who is used to Brokerage Hype.

2008 Nov 28 12:38 PM

[notsosmart:]

just think for yourself.dont be fooled by any anal st.all have an agenda.

2008 Nov 28 01:54 PM

[January Thaw:]

I'm beginning to think that if you want to be in the oil patch...get ready
to pick up some of these things real cheap...and get ready for a very
interesting ride. It's time to make a decision. There's ng in US and
these things up in Canada. It just may be that you'll be able to pick
up some of these for a few dollars...hold them for a couple of years
and see what happens. The way the economy is going no one knows
what will work - so if you like the oil patch...this is about as good as it
gets - US ng. Way to go.

2008 Nov 28 03:07 PM

[thor_92108:]

The author failed to mention that PVX has already posted a rate cut (from .10-.11./month to .09 Canadian) due to the condition of the market.....also that PWE will hold steady until February...he(the author) hasn't done his homework........

2008 Nov 28 06:42 PM

[User 309024:]

I'm curious about the comment that PGH is building a pilot plant to use steam rather than NG to extract oil Query: How will they produce the steam? Burn coal, perhaps.
Steam assisted gravity drainage is widely promoted for use with tar sands so the approach is hardly new.
Probably only a few producers use natural gas to produce oil, carbon dioxide, yes but .......

2008 Nov 28 10:18 PM

[NOWHEREMAN:]

NG is the principle way Tar oil is extracted and converted to heavy oil, steam extraction and conversion as proposed by PGH is as yet untested commercially. Suggest looking at the big Kahunas in this area like Suncor to see the process.

At least, this is the way Canadian operations work. But then I could be way behind the curve here since I haven't followed the extraction process for a few years. Especially since I've never associated mining tar with drilling for oil. There just aren't enough refineries capable of processing tar so NG is used as the energy source to make it fluid enough to ship via pipeline. There is more to it than this but I know enough about it to know that NG shipments to the US will have to be curtailed to increase Canadian production. Large amounts of Greenhouse Gases are released and Canada has been forced to consider building Nuclear Reactors to reduce the amounts released as part of their Kyoto commitments.

BTW, the US has large quantities of the same sort of substances. Ever hear of the Black Sands? Look under Tar in the Wikipedia, lots of major environmental concerns with vitually none of them being addressed. Toxic air, water and land are byproducts of most of the processes currently underway.

You might as well use coal since toxic air is the primary concern with it.

IMHO

2008 Nov 29 12:27 AM

[kurt walter:]

I would expect some dividend cut with oil and gas prices down. So what. Long term these trust just continue to crank out dividends month after month.

2008 Nov 29 07:26 PM