Indicated and estimated distribution yields rise to a median 12% for 2009 while several income stocks decline to new lows in stock price. January oil settled at $43.67 a barrel in contrast to the average for the next six years at $69.40. December 4 settlement prices for futures for next twelve months deliveries of Light, Sweet Crude Oil at $51.20 a barrel and Louisiana Natural Gas at $6.45 a million btu are in our estimates.
Despite the low near-term prices, the U.S. Royalty Trusts would distribute a median 9.9% next year. Similarly, the low current futures prices support an estimated distribution yield of 9.2% for buy-recommended Canadian Oil Sands Trust (COSWF.PK). Indicated distribution yield of 18.9% at Enerplus Resources Fund (ERF) is covered by equity cash flow while Pengrowth Energy Trust (PGH) and hold-rated Penn West Energy Trust (PWE) would not be able to sustain the current distribution rate if current oil and gas futures prices materialize. To pay a distribution yield of 21.6%, Linn Energy Energy (LINE) has derivative contracts that pay oil and gas prices higher than the current futures prices, but similar hedging has not insulated Encore Energy Partners (ENP), nor PWE, PGH and ERF from steep stock price declines. As a result, owners of Linn should seriously consider switching to other income stocks because a wide McDep Ratio gap has opened between Linn and the rest.
Experienced taxable investors are familiar with the potential to generate a positive tax benefit from selling a stock at a loss while preserving opportunity by simultaneously buying a similar stock. The substitute stock may be held only long enough until the original stock can be repurchased without undoing the tax benefit or it may become a new long-term investment. Subject to differing stock market liquidity, investors harvesting a tax loss might interchange buy-recommended Hugoton Royalty Trust (HGT), hold-rated San Juan Basin Royalty Trust (SJT), Dorchester Minerals L.P. (DMLP), Cross Timbers Royalty Trust (CRT) and Mesa Royalty Trust (MTR). The three Canadian income trusts holding conventional oil and gas resources, ERF, PGH, and PWE, appear readily substitutable on the basis of resource emphasis, moderately-high debt, and high income level.
Investors in COSWF may find the most closely related investment characteristics, except for distribution or dividend policy, in hold-rated Suncor (SU). Surprises in stock price action can diminish the benefit of tax-motivated transactions.
Originally published on December 5, 2008.