Among five stocks in our Canadian Income Trust group, we rate Canadian Oil Sands Trust (COSWF.PK) Contrarian Buy. “Contrarian” acknowledges that current stock price is in a downtrend defined by price below the 200-day average. “Buy” signifies the appeal in production of high quality synthetic crude oil, long life resources, lowest McDep Ratio of 0.67 and cash distributions currently at the rate of 7.6% a year. The remaining four stocks are also attractively priced at McDep Ratios of 0.73-0.87 and distribution yields of 9.2-11.0%. Believing that Canadian proven reserves can be conservative, we include reported probable reserves in our determination of adjusted reserve life used in estimating Net Present Value for those stocks. In addition, Penn West Energy Trust (PWE) justified our raising NPV to US$23 a unit from $19 as a result of the May 13th announcement that China Investment Corporation would invest C$817 million in a partnership to develop PWE’s Peace River oil sands resources. The good news may be helping PWE units to trace an uptrend with current price above the 200-day average. Natural gas producer Peyto Energy Trust (OTCPK:PEYUF) also trades in a unit price uptrend. Measured by futures prices for the next six years, natural gas may turn up before winter, but oil has turned down amid the week’s market turmoil.
Upsides in Resource Value
A longer life usually means a higher value. We see reserves to production ratios (Adjusted R/P) ranging from about 7 to 31 for the five trusts. At the same time, unlevered cash flow multiples (PV/Ebitda) range from 7 to 13. Natural gas multiples are higher than oil multiples because we expect future natural gas price to be higher relative to oil price than it is today. PV/Ebitda increases steadily with reserve life up to about 15. Present value increases further at a declining rate for reserve life beyond 15 as
