Eye On Pengrowth Energy Trust

The Canadian Royalty Income Trusts have been devastated by the triple whammy of the government’s proposal to levy a harsh tax against the income of those trusts, the falling price of oil and gas, and the Canadian dollar’s decline against the U.S. dollar.

But there are signs that the Canadian government may soften the blow by grandfathering existing royalty trusts, or by extending the waiting period before implementation to ten years; and there are signs that the collapse of energy prices may be in a bottoming process. If energy prices stabilize, the Canadian dollar should as well.

After studying charts of several of these trusts which trade on the U.S. exchanges, I rather like Pengrowth Energy Trust (PGH). PGH has declined from a high of 25 last May to a low of 14.77 in November. But unlike most of its fellow Canadian Royalty Trusts, PGH made a higher bottom during the January plunge than it did last November.

The chart exhibits a bullish short-term configuration and on-balance volume is constructive. Distributions over the last 12 months have been $3.00 Canadian, or $2.56 U.S at current exchange rates, so this security has a gross current yield of 15.13% for U.S. investors, as well as significant capital appreciation potential.

PGH 1-yr. chart

Related Articles: Canada's Changing Political Winds and the CANROYs; Year-End List of Monthly Dividend Stocks (updated); Canadian Royalty Trusts That Trade in the U.S.

Comments

[Quaker:]

There are three trusts I rather like. PGH, HTE and True Energy. Oil and Gas are relative commodities. Just as Canada announced a new tax, so did the USA. I contend that Canada's 31% tax is far less than the US "one barrell in eight."

HTE has a refinery in Newfoundland. Newfieland could be the next Beaumont. Canada has traditionally been desperate for development there.

Also, if you brush aside the pundits, now could be the bext time to buy energy. This price correction is futures related. You have to remember, opec went to a futures pricing system from the old one based on Omani spot. This made the futures market far more significant.

But the industry hasn't changed. If Saudi Arabia is so awash in crude, why are they ordering jackups? Also, if all this ballyhoo'd new production is coming from Harad, why do they have a dozen jackups drilling Safaniyah offshore? (light sweet)

It would be obvious to Forest Gump that Russia, Mexico and Venezuala aren't investing in their own fields. Eastern Siberia is a fantasy. Russia is overproducing and stuffing the money in the Camen Islands. This you can see in the treasury auction. Soon Russian production will fall.

Pemex is an overindebted, banana republic basket case. Their own ex CEO says they could be out ofthe export business in 5 years.

The point is, a huge percentage of world production is in aging fields controlled by socialist governments or inept Monarchies that are more interested in drilling for money than drilling for oil. Canada may be liberal, but they're not socialist.... yet.

2007 Jan 15 09:33 AM

[Saul Sterman:]

"I contend that Canada's 31% tax is far less than the US "one barrel[l] in eight."

One in eight is 12.5% which is less than 31%. True to say that if this was literally a barrel upfront that this would have to be calculated on a cost basis and not profit. Still, this is less than 31% of profits.

Respectfully disagree with the main thrust of the rest of your comment. Our research (CrossProfit) disputes your factually and figuratively oriented statements.

2007 Jan 15 11:58 AM

[Quaker:]

What? A royalty is a tax on gross sales, an income tax is a tax on net profit. 31% of 20% (their distribution, which will be taxable) is 6%.

2007 Jan 15 01:09 PM

[Saul Sterman:]

"A royalty is a tax on gross sales"
see www.cbo.gov/showdoc.cf...;sequence=2

"31% of 20% (their distribution, which will be taxable) is 6%."
Correct version...

" 1. That a Distribution Tax (at a rate of 21% for 2007, 20.5% for 2008, 20% for 2009, 19% for 2010 and 18.5% for the 2011 and subsequent calendar years, plus 13% on account of provincial income tax for each of those calendar years, prorated for taxation years that include days in more than one of those calendar years) apply to certain distributions from publicly-traded trusts (other than real estate investment trusts) and publicly-traded partnerships, with effect

(a) for any trust or partnership in which investments are publicly traded before November 2006, for taxation years that end in or after 2011, and

(b) for any trust or partnership in which investments are first publicly traded after October 2006, for the first taxation year of the trust or partnership that ends after 2006 (or its first taxation year in which investments in it are publicly traded, if later) and subsequent taxation years,"

BTW, the stated objective makes it even clearer...

"The Honourable Jim Flaherty, Minister of Finance today announced a Tax Fairness Plan for Canadians. The plan will restore balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations...

For months there has been a growing trend toward corporate tax avoidance. Top Canadian companies, operating within the current rules, have announced their intention to convert to income trusts. They feel compelled to seek more favourable tax treatment by capitalizing on an available tax rule..."

Should I spell it out...? Canadian taxes are higher than U.S. and royalties replace procurement costs...

2007 Jan 16 06:23 AM

[elliot_mllr:]

The Canadian dollar's decline is a direct result of the tax proposal and the decline in oil and gas prices, rather than an independent factor.
Today, the Liberals stated that they are are initiating a Finance Committee investigation of the Canadian government's tax proposal in the House of Commons; if they don't get it there (which they should, by a 6-5 vote in the House Finance Committee if the Bloc votes with them) then they're committed to having it in the Senate, which the Liberals control. The Bloc is also joining in the fray against the tax in anticipation of an election soon, with both the Liberals and the Bloc targeting retirees. There will likely be a no-confidence vote over the budget next month and an election in the spring. Meanwhile the Canadian Coalition of Energy Trusts is going to launch a medial campaign against the tax.
Why limit yourself to Canadian energy trusts traded on the NYSE? I, as an American, own Crescent Point Energy Trust which is traded on the TSX, and it can be easily purchased by any large US broker (I use Merrill Lynch). Crescent Point's production (and I believe reserves) is 85% light, sweet crude with API gravity of 36-42 degrees, and only 15% gas. It is acquiring Mission Oil and Gas which has a large play in the Bakken field and is also producing light, sweet with a low all-in operating cost. Crescent Point hedges 3 years out and because of effective hedging can sustain its dividend at $40 WTI. It yields about 13%.

2007 Jan 15 01:04 PM

[Quaker:]

Well, there's certainly more liquidity on NYSE but I get your point. I bought Canadian Oilsands and Viking in 2003. At the time Viking was pre Harvest.

I do like canada, though. They have a balanced budget and a conservative government. (for investors, conservative governments pay their bills) I also like canada because they're not Saudi Arabia.

I worked Ghawar as an engineer for 8 years in the 80's. I can assure you, 99.9999% of the saudi managers have zero idea what they're fields are doing. All anecdotal evidence points to rapidly declining production.

I could post for hours on Ghawar, safaniyah inland and offshore. The ghawar flood front advance never worked correctly. The field is only contigouos at the top, in the dolomites. The rest is a permeability nightmare.

I think most of the volitility in oil is from the same sourse as volitility in housing and stocks. Too much money chasing too few investments. but of course, time could prove us all fools.

2007 Jan 15 01:38 PM