Oil Income Stocks Decline to New Price Lows

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 |  Includes: COSWF, CRT, DMLP, ENP, ERF, HGT, LINEQ, MTR, PGH, PWE, SJT, SU
by: Kurt Wulff

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 (OTCQX:COSWF). Indicated distribution yield of 18.9% at Enerplus Resources Fund (NYSE:ERF) is covered by equity cash flow while Pengrowth Energy Trust (NYSE:PGH) and hold-rated Penn West Energy Trust (NYSE: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 (NYSE: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 (NYSE:HGT), hold-rated San Juan Basin Royalty Trust (NYSE:SJT), Dorchester Minerals L.P. (NASDAQ:DMLP), Cross Timbers Royalty Trust (NYSE:CRT) and Mesa Royalty Trust (NYSE: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 (NYSE:SU). Surprises in stock price action can diminish the benefit of tax-motivated transactions.

Originally published on December 5, 2008.