Citigroup Forecasts High Distribution Cuts By Canadian Royalty Trusts

Production levels, the rapid decline in commodity prices and rising operating expenses have prompted Citigroup to forecast a 20% average distribution cut by Canadian royalty trusts. The firm has reduced is oil price assumptions to $70 for 2009 and to $75 for both 2010 and 2011, after lowing its oil and natural gas expectations about six weeks ago.

The sharp rise in units of Harvest Energy Trust (HTE) during the past six weeks, while crude oil and natural gas prices have declined, has prompted a downgrade from “buy” to “hold.” Analyst Richard Roy expects its annual distribution per unit to fall from C$3.60 to C$2.70 beginning in March.

He sees similar reductions for Enerplus Resources Fund (ERF) despite its recent 19% reduction to C$4.56. Citigroup is forecasting a further 21% cut to C$3.60 per unit in the second quarter. For Pengrowth Energy Trust (PGH), the firm sees its payout falling from C$2.70 to C$2.30.

Noting that there are a number of factors impacting distributable cash flows, Mr. Roy told clients:

Recognizing that the situation is fluid, we estimate such distribution levels would be sustainable over the medium term. Given that the fundamental backdrop has changed over the past 18 months, in our opinion management teams will strive to decrease risk, maintain financial flexibility, pay down debt, and focus on the efficient operation of the asset base.

However, for investors willing to take on the risk and to beyond the next 12 months (the basis for Citigroup’s target prices), it views falling commodity and unit prices as an opportunity for a longer term investment in energy.

Comments

[NOWHEREMAN:]

I don't know of any Candian Trusts. This the same group that just forecast $2000 Gold. This seems kind of contradictory since I can't see gold at $2000 without a move by oil to stoke the inflationary pump.

I believe that the Canadian Trusts will follow PVX's lead on the short term but don't believe that will last through 2009. Of course, an oil spike with associated dollar declines could reignite Gold, but not with the scenario painted above.

So, either they are right about Gold and wrong about oil or wrong about gold and right about oil. Just common sense. IMHO

2008 Dec 02 05:02 AM

[Lee 99:]

For US investors they have already cut dividends by 20% with the weak loonie.
Re most analysts opinions, it looks like one, it smells like one and I am glad I did not step in it.

2008 Dec 02 07:11 AM

[smurphny:]

The real issue with the CANROYs and Amer. oil trusts is the price of oil and the potential decreases in share price. Dividends are a side story. The bear market in crude is not close to being over yet. Irrationality may bring oil down to $20/brl, as far on the downside as it went on the upside. That will be the time to get back into these trusts. If oil plummets further, Canroys may all trade in the single digits for some time. Remember, with the concept of "cheap" : from $5 to $2.50 is a 50% loss. Hold for now because there will be a tremendous opportunity later. I think there WILL be clear signs that the bottom in crude has been reached. Look for news hints that supply is dwindling, refining capacity has been hurt by abandoning new projects (HTE), or reserves are leveling off. If OPEC suddenly comes up with a way for members to comply with reasonable quotas would be another signal. As with any investment, confidence is needed. Right now there is none and no clarity. The oil-driven economy of the world is not going away any time soon but for now, the bear is alive and well.

2008 Dec 02 08:31 AM

[yank:]

$20 oil is a "pipedream". Yesterday OPEC laid the groundwork for a 2 mill bbl cut later this month. The oil demand numbers are ramping up over the past month as prices plummeted. China's massive stimulus program will result in big oil demand numbers. China's oil import number in September increased 28% yoy (highest monthly increase ever). Not to mention all the CAPEX work being cancelled in the oil sands and elsewhere added to the massive declines in production we are seeing this year in Mexico and Russia.......... You catch my drift. Oil prices have bottomed right here.

2008 Dec 02 09:00 AM

[Americanrm:]

I have to agree with Yank.
As Will Rogers once said about land: "They aint makin' no more of it 'round here." And, we all know, the same can be said for oil... all the experts say that we have either neared or passed peak oil production and... "They aint makin' no more."
The Canroys are very probably near their bottom and seem attractive as a long-term hold - at least until early 2011, when the Canadian tax laws change.

2008 Dec 02 09:52 AM

[secmaven:]

Canroys are a wasting asset. The so called "dividends" they pay may be subject to the Canadian withholding tax but such payments are really just a return of the investors capital. And remember, the October massacre when these trusts start being taxed by the Canadian IRS as corporations is coming fast.

2008 Dec 02 01:57 PM

[je:]

Who in the world is Richard Roy?

2008 Dec 02 02:21 PM

[macsmart:]

Canroys are not a "wasting asset". You're confused between Canadian Royalty Trusts and American Trusts. It's the american trusts that are a return of capital.

2008 Dec 04 05:29 PM

[TSC:]

I started to own canroys before they registered in the US, my first was in 98. A few things to consider before you jump into the present price decline:
1)Costs of extraction vs. price
2)Life of reserves versus replacement
3)Currency fluctuation Can/US

You can live with 3 been out of sync but you cannot own any if 1 and 2 are not in line with the market.

I hope I make it simple enough and it helps.

2008 Dec 05 01:48 AM

[GFS:]

Last I saw, HTE sent a lot of it's refinery run as diesel, to Europe ( at a premium). Has given them a little better crack spread and they can run heavier crude, at a better cost.
As for divy cuts...with shares at $9.50, where I'm in, the cut to $2.70 annual
divy,still works out to 28.4%. Not so bad, and share price should rise with oil and gas, when they go up. Nat gas under $6.00 seems awfully cheap to me and I think very temporary.

2008 Dec 05 12:48 PM

[Ames Tiedeman:]

NG under $6.00 is a joke. Look at PVX, they have a lot of Gas. Even with the cuts the yields are terrific. And guess what? Oil will be back to $100 again and you will see major capital gains on thee names with increased dividends looking out 2 or 3 years..

2008 Dec 14 11:42 AM

[kurdis:]

What are the tax implications for IRA accounts? I understand it's our own IRS that withholds 15%; not the Canadian Government. What's the rationale - or better yet - the legitimacy behind this - and if true, does it negate ownership of Canroys for IRA accounts?

2008 Dec 26 04:20 AM

[jfr1107:]

Don't forget HTE already made a div cut in Nov 2007 when they lowered the div from .38CDN to .30CDN. To do another div cut within 15 months of one made previously would not be a wise business decision and HTE management is a lot smarter than any analyst with the way they have hedged money, processed petroleum products, oil futures, etc. So, rumors about HTE cutting its div is to sew fear into people selling or people looking to get rich off the options market.


On Dec 02 07:11 AM lee99 wrote:

> For US investors they have already cut dividends by 20% with the
> weak loonie.
> Re most analysts opinions, it looks like one, it smells like one
> and I am glad I did not step in it.

Feb 08 05:55 AM