ARC Energy Trust: Shares Jump on Distribution Increase

ARC Energy Trust (AETUF.PK) units were up more than 6%, following Thursday's announcement that ARC had raised its dividend by 17%.

ARC said it has increased its "top up" monthly distribution from C$0.04 to C$0.08 bringing its total monthly distribution – base + top-up – to C$0.28 per unit. That represents a 40% increase from the start of the year.

The trust also said it is increasing its capital spending budget by 17% from C$470-million to C$550-million, mostly for the purpose of developing its position in the Montney play in Northeast BC. C$200-million or 36% of the revised budget will be allocated to add land within the Montney play and to build a pipeline in order to increase production there.

In a note to clients, UBS analsyt Grant Hofer said:

Through the development of a new processing facility (staged in 2010/11 adding 60 million cubic feet per day), ARC should be able to deliver strong growth from the Montney play, providing a growing production profile for the trust.

He added that by 2011, ARC production will be above 70,000 barrels of oil per day – nearly a 10% increase on 2008 levels. In the near term, Mr. Hofer said the growth is more modest in the range of 2% to 4% per year.

The analyst increased his price target on the news from C$30 to C$31 but maintained his "neutral" recommendation given the current valuation for the stock.

Meanwhile, RBC Capital Markets analyst Fergal Kelly maintained his "sector perform" rating and left his C$33 price target unchanged.

Comments

[Jack Yetiv:]

This is a harbinger of things to come. Earnings season for the Canadian Royalty trusts starts in a few weeks, and I suspect they will generally announce blowout earnings, with falling payout ratios and anticipation of even better earnings as 2008 hedges fall off.

My favorites are PWE and AAV, as I have written in articles on this site. They both had low payout ratios in the first quarter (53 and 58%, as I recall), meaning their payout ratios should get to an incredibly low level in the 40's this quarter.

The extra money will be able to be put into (a) paying down debt, (b) increasing dividends, and/or (c) increasing drilling and acquisitions. My guess is that most of the Canroys will do all three, except that PWE probably won't increase dividends this quarter (I think they will next quarter if oil and gas prices stay where they are) because they want to pay down debt more quickly.

Regardless of which one of the three things the Canroys do, it's all to the good. I expect a stupendous earnings season for the Canroys--as well as many other oil and gas concerns.

Jack Yetiv

2008 Jun 30 10:40 AM