UBS Analyst: Energy Trusts Offer Exceptional Value

The way Grant Hofer sees it, even when you lose you win.

Mr. Hofer, the UBS Securities guy crunching data on royalty trusts in Calgary, thinks now is the time to take a good look at the group.  The trusts he covers are down 8% over the past month (but still up 34% this year), and Mr. Hofer thinks “the sector appears to us to be very well positioned and offers exceptional value today.”

Cash yields, he says, have climbed 10.7%, which makes the trusts attractive, given payout ratios of about 50% in 2009. His numbers are based on $120 per barrel oil and $10.10/mcf for natural gas.  Don’t think those prices are reasonable? No sweat.

In bold, he wrote:

 Should commodity prices continue to pull back, we believe that the yield should provide attractive support for unit prices.

Vermilion Energy Trust (VET) and Crescent Point Energy Trust (CPGCF.PK) were his two favorites on Thursday, given their high weightings to crude oil and growth plans and because of their acquisitive ways.

Mr. Hofer’s target on Crescent Point is $45, and he expects Vermilion to get to $49. Vermilion, he thinks, will be “essentially debt-free” by the end of the year.  “With its low payout ratio, 75% weighting to crude oil (unhedged), and sector-based netbacks, the trust remains our best overall pick in the sector.”

For those of you who like to dig deeper into the numbers, Mr. Hofer notes the trust group is trading at just 83% of net asset value.

He said:

This is the lowest level that we can recall (typically the sector trades at a premium to our conservative NAVs).

When analysts get excited, they (sometimes) come up with eye-catching headlines for their reports.  Looks like Mr. Hofer falls into that category on this one.  At the top of his report, he wrote: “Valuation update: Back up the truck!”

Comments

[jjason:]

But what will happen to unit prices for Canadian Energy Trusts if oil drops to $90 or $100 per barrel and natural gas prices drop to $8.50?

2008 Jul 18 07:30 AM

[casey00001:]

Call me old school but I get leary anytime a pink sheet stock in recommended.

2008 Jul 18 08:39 AM

[elliot_mllr:]

To jjason:
Please note that Crescent Point is very effectively hedged at prices around $100 and up. Their hedges are posted on their web site. They have some at $140.

2008 Jul 18 10:41 AM

[Steven Ward:]

The trusts are inly " pink sheeted" because they refuse to pay thge fees for Amex or NYSE listings. That is not a reason to avoid them as most are multi-billion in assets.

Stretching for higher yield will be a problem down the road for those who blindly go for yield. It is best to purchase those that have true growth comming on-line like Advantage, Vermillion, Crescent Point and Peyto.
It will be hard to beat Vermillion as most of its assets are overseas and therefore avoids the Alberta Royalty hike as well as Crescent Point where all there growth assets are also not in Alberta.

2008 Jul 18 11:09 AM

[Emerald:]

Stick with better known names such as Enerplus, Pengrowth and Provident.

2008 Jul 18 12:18 PM

[Loup-Garou:]

Thank you Mr. Eliot Miller, for your good words.

These stocks are pink sheet in U.S., but trade legitimately on the Canadian exchange--Toronto I think.

Vermilion has assets in France, which if a negative to me because of French labor laws. Crescent is certainly a "Businessman's Risk", as the old Forbes magazine used to say.

2008 Jul 18 12:57 PM

[BoneYard:]

Keep in mind proposed changes to Alberta tax/royalty laws, the coming changes to the income trust market (where trusts must covert to corporate structures) and the tax implications for foreign investors.

2008 Jul 18 01:35 PM

[Jack Yetiv:]

To JJason:

My three favorite trusts (PWE, AAV and PVX), all of which trade on the NYSE, had payout ratios of 53-58% in Q1, based on oil priced around $80 and gas at about $7.50. Thus, even if oil averaged "only" $100 going forward (which I consider unlikely) and gas averaged "only" $9 going forward, these trusts income WOULD GO UP SUBSTANTIALLY.

I think the projection of $120 oil and $10 gas is reasonable going forward, if not outright conservative.

Expect several trusts to increase dividends after earnings are announced in August, and other trusts will increase after Q3 is announced in Nov.

For more details, see my articles on PWE.

Jack Yetiv

2008 Jul 18 02:14 PM