The first quarter was not a pleasant one for the energy trust sector, as plummeting commodity prices left many of them worrying about their balance sheets a lot more than their operations. But Canaccord Adams analyst Kyle Preston offered up at least one piece of good news: all the companies in his coverage universe survived, and are positioning themselves for a better second half. Plus, their earnings were largely in line with his expectations (which were pretty low).
Mr. Preston noted that cash flows in the group fell 37% year-over-year, with production down an average of 7%. On the positive side, there was a slight decline in operating costs, and debt-to-cash-flow ratios remained reasonable.
Despite the rough quarter, Mr. Preston wrote in a note that most of the trusts came through the quarter "relatively unscathed."
Balance sheets remain relatively strong, while current distribution levels and capital spending plans seem to be relatively balanced and sustainable, at least for the remainder of this year.
He noted that companies are still watching commodity prices very carefully, but the recent rise in oil prices may encourage some of them to actually increase spending on some projects. But natural gas prices are still not nearly high enough to justify more drilling, he wrote.
The energy trusts unit values have gone up dramatically since the market turned around in March, and Mr. Preston wrote that some of them are looking pretty expensive. He recommended names with strong balance sheets, sustainable distributions, and more exposure to oil than natural gas. He highlighted Vermilion Energy Trust (VETMF.PK), NAL Oil & Gas Trust (OTC:NOIGF), and Crescent Point Energy Trust (CPGCF.PK) as three companies that meet the criteria.