Oil Income Stocks Decline to New Price Lows

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.

Comments

[Ishortyou:]

time to invest the money on new age energy technologies, fossile fuel pollution is giving everyone a headache.

2008 Dec 30 08:05 AM

[NOWHEREMAN:]

It may be time to invest Is, but no one's going to because oil is priced too low.

The Catch 22 Syndrome.

2008 Dec 30 08:28 AM

[beabaggage:]

low share prices to book value of proven safe country CN assets will keep PGH/PWE etc. (long) up. They can tweak capex and hedge to keep cash flow going. SU in a low oil price scenario is a big risk for sure. consolidation of CN oil/gas cos is the next wave. big spiders CVX, XOM, COP etc. can snatch up good assets and potential fields for a song now. tarsands only viable with high oil, regardless of subsidies. new wave of environmental concern for oilsand mess harming migratory birds will keep conventional oil/ngas in focus, unconventional energy (wind, solar, oilsands, etc) again will be a memory just like before. Obama will just not have the money available to make a substantive shift in energy resources. so buy away, load up on fallen canroys and benefit from CN $ appreciation, divs, assets in a safe country, forget clean energy and alternatives.

2008 Dec 30 08:36 AM

[Andy1234:]

What good will electrical power do for transportation right now?

2008 Dec 30 08:37 AM

[toomuchgas:]

Obama will waste what little money is left on expensive alternative energy that produces few jobs and we will continue on the route to a serious depression.

2008 Dec 30 09:08 AM

[zayttrader:]

<<<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.>>>
LINE is 100% hedged for 4 years. Most of these other names (particularly the Canroys) are only hedged for 1 or 2 years and only at 20%-30%.

2008 Dec 30 11:04 AM

[NOWHEREMAN:]

Pinelli:

This particular Article is a reprint of one originally posted on Dec. 5th, 2008. Had you bought 500 shares of LINE on that or the subsequent day, you would have made over $1700 or enough to pay for Mr. Wulff's advice.

Your own advice in your Own posted Articles has so many investors under water that even SLW has to double again just to break even or go up another 500% in the case of CDE.

List all of your recommendations in the 5 Articles you have published and tell me How Good your own advice has been. How much money did you make, while ridiculing others over the Past 12 months.

I know you won't bother, so I'll do it for you. There are only 5 articles to review. The year isn't over yet, maybe something will be up.

2008 Dec 30 11:47 AM

[NOWHEREMAN:]

I see you recommended Line on 2/19/2008. The stock only has to go up another 40% to break even ex divs. 3 days later you pushed it again at an even higher price BUT as soon as it started its descent it was time to recommend other stocks to the unwary.

If anyone had bothered to hold onto it all the way down they would have lost about 50% after your LINE Recommendations.

You dare to make light of what others recommend while you continue to shovel and move on.

For Shame.

2008 Dec 30 12:18 PM

[searcher:]

"..Surprises in stock price action can diminish the benefit of tax-motivated transactions.."

This is my nomination for the J P Morgan award. Ya gotta love it!

2008 Dec 30 04:08 PM

[zayttrader:]

On Dec 30 11:47 AM aitvaras wrote:

> Pinelli:
>
> This particular Article is a reprint of one originally posted on
> Dec. 5th, 2008. Had you bought 500 shares of LINE on that or the
> subsequent day, you would have made over $1700 or enough to pay for
> Mr. Wulff's advice.

Huh? Wulff was suggesting that LINE investors should "seriously consider switching to other income stocks." IOW, he would have had them sell at $11.20. The stock closed at $14.98 today. That's really bad advice even for Wulff.

For a long time he has been ranting against KMP. Yet, if you had bought it when he was trashing it, you would have outperformed the market and his own recommendations by double-digits. Wulff's problem is that Rich Kinder once humiliated him for being completely ignorant during a conference call.

2008 Dec 30 08:32 PM

[Greg Pinelli:]

ztrader..You are correct..LINE has been a solid investment and like a lot of safe haven equities has been caught in the financial whirlpool..I have tremendous respect for LINE and PWE and the people who run them..It's VERY easy for know nothings to trash the people who run them and their prospects..But..like you..I've put my money where my mouth is..and LINE is a great equity......


On Dec 30 08:32 PM zayttrader wrote:

>
>
>
> On Dec 30 11:47 AM aitvaras wrote:

2008 Dec 30 08:54 PM

[auto44:]

YOU ARE RIGHT IT IS A PIPE DREAM


On Dec 30 08:37 AM Andy1234 wrote:

> What good will electrical power do for transportation right now?

2008 Dec 31 01:55 AM

[Greg Pinelli:]

I wanted to follow up on LINE and ztraders remark...LINE has been hammered this year..but if investors look in the rearview mirror like aitvaras (NoWhereMan!) you won't make a dime and you'll constantly reflect on the impossibilities instead of the possibilities...
LINE is one of MANY very profitable investments for 2009..Look at some Closed End Funds also..GCS..DCS..BHD......
Thanks to all those who actually provide some analysis and honest opinion to this site......

2008 Dec 31 09:10 PM

[NOWHEREMAN:]

Mr. Wulff: The only reason Linn Energy is being tauted as a screaming buy, is that management screwed up early in 08. They hedged their production as oil was rising and would have lost money hedge had there not been a Global Slowdown and outright recessions around the Globe. Now they are being praised, had oil remained above $120, they would have been booed.

IMO

Jan 01 10:40 PM

[Itsonlymoney:]

2008 was a hard year to make money for everyone on the long side of the market. Picking a few winners and losers out of many investment ideas is a suckers game. I have always had an easier time buying low than selling high. Well, 2009 will present us another opportunity to do just that. Now will somebody please remind me to sell high in a few years. I have appreciatedreading Mr Wulff's position even if I get it 30 days late on his website. It is a tool, not an oracle. Use it that way.

Owning healthy dividend payers is my way of staying sane in this roller coaster market. What's yours?

Jan 02 12:41 PM

[Dan Notestein:]

In general, Wulf makes good points, but he's clearly wrong in this case about the amount of hedging from LINE versus PWE and others. LINE is considerably more hedged, and their plan to swap their current 5 year hedging position for a shorter 2 year term, higher valued one looks like a great plan.

NOWHEREMAN claims LINE management 'screwed up" in 08, but in hindsight, clearly they didn't. They hedged their risk well, it's not really subject to argument now.

Despite Wulf's mistake here, his general analysis of O&G stocks is solid. In particular, he's right on the money about the MLP's with 50% IDRs such as KMP. That scams like this are so easily perpetuated in the face of direct warnings is a clear sign that we're doomed to repeat stock market disasters for many years to come.

Jan 12 11:05 AM