3 Canadian Income Trusts Making the Most of Oil Fields

Canadian Income Trusts, including hold-rated Penn West Energy Trust (PWE) along with unrated Pengrowth Energy Trust (PGH) and unrated Enerplus Resources Fund (ERF), have become dominant operators in great old conventional oil fields of Western Canada that are ripe for enhanced recovery. The trusts’ rate of distribution is appealing at 12.5%, 13.3% and 9.1% a year respectively. Investor skepticism reflected in low unlevered cash flow multiple (EV/Ebitda) of 6.2, 5.7, and 6.1, adds to the investment appeal.

Meanwhile, the trusts are beginning to make lemonade since having lemons tossed at them in the form of a prohibitive increase in trust taxation to begin in 18 months. Managements are accumulating reinvestment deductions that can be used to reduce taxes and to facilitate higher than average dividends when the trusts most likely convert to corporations. During the transition, PWE, PGH and ERF are adding experienced exploration and production leaders.

Among the opportunities is the recovery of more oil from mature assets. PWE’s Murray Nunns, at the Canadian Association of Petroleum Producers conference in Calgary on June 15, declared that the biggest prize from drilling horizontal wells with multi-stage fracturing (HZMF) will be won in existing fields. One target oil field is super giant Pembina, majority controlled by PWE. HZMF is the breakthrough technology that has unlocked the hydrocarbons sealed in shale formations thereby increasing potential supply by a third or so.

McDep Ratios are low for PWE, PGH and ERF at 0.65, 0.65 and 0.58. The units are out of favor with unit price still below the 200-day average in contrast to most oil and gas stocks. Revising Net Present Value (NPV) for ERF to US$40 a unit from $44 contributes to the narrowing of valuation range. The adjustment for ERF reflects a correction to a rise in unlevered present value cash flow multiple (PV/Ebitda) beyond that indicated by reserve life.

Originally published on June 19, 2009.

Comments

[MikeyLV:]

"Managements are accumulating reinvestment deductions that can be used to reduce taxes and to facilitate higher than average dividends when the trusts most likely convert to corporations."

PGH converted the US holding trust to a corporation either July 1. PWE, I think, already is under a corporate structure.

Jul 13 12:37 PM

[Alex I:]

Any color on how PWE's hedges will help them despite the lower move in oil?

Jul 13 01:38 PM

[Hyperinflation:]

With you 100%, I would also include the candian oil sands unit trust but I'm one of the few who have taken a liking to the sands.

Jul 13 10:10 PM

[Old Trader:]

I've held both PGH and PWE, in the past, and don't understand how you missed PVX, the only CanRoy I still hold.

Jul 13 10:26 PM

[shelzinha:]

I need to play catch up. I've owned PGH for a number of years, but have not been following it. The dividend is so attractive. Is it still worth owning/buying? What are the risks please?

Aug 20 01:03 PM