Protected Principal Retirement Strategy: Eagle Energy Trust

Oct.16.12 | About: Eagle Energy (EGRGF)

Eagle Energy Trust (ENYTF.PK) is a Canadian energy trust that owns and exploits oil and natural gas resources in central Texas. Formed in 2010 as a mutual fund trust, it is the first new energy trust established in Canada since 2006.

Eagle is well-situated relative to other energy trusts due to its strong position with respect to oil (98 percent oil and natural gas liquids).

I believe that Eagle is a good candidate for inclusion in the Protected Principal Retirement portfolio, and here is why:

Resources And Production

Eagle's principal interests are the Salt Flat Field and the Midland Area, which are near Luling and Midland in central Texas. Production presently consists of 98 percent oil and natural gas liquids and two percent natural gas.

Production during the first half of 2012 averaged 2900 Boe/Day, which is anticipated to increase to 3600 Boe/Day in the second half of this year.

Current hedges are in place at oil prices varying from $87/barrel to $108/barrel.

It would appear that oil resources in Eagle's areas of production will continue to yield sufficient products to sustain anticipated growth forecasts made by the company.

With the world dependency on oil and natural gas not diminishing markedly, the questionable nature of alternative energy sources, and Eagle's projected production levels, I believe the future for the company (and its stock price) is very optimistic.

Financial Data

For the quarter ending June 2012, Eagle's revenues increased by 79 percent, and earnings increased by 403 percent (Source: Yahoo Finance).

Per the company's quarterly report, funds from operations (FFO) was $7.2 million -- an increase of 44 percent quarter over quarter. Funds for distribution totaled $6.62 million.

Distributions And Taxes

Eagle pays a monthly distribution to shareholders. The present rate is $.0875/month, and the distribution is subject to Canadian withholding tax of 15 percent. Net of taxes, the distribution would be $.0744, or a yield of 8.78 percent, based upon today's stock price of $10.16.

The targeted payout ratio is 50 percent. However, due to recent purchases of properties in the Permian Basin, the current payout ratio is just above 100 percent.

Oil pricing at or above $75/barrel would enable Eagle to target a payout ratio of less than 80 percent.


Although I have not made any purchases yet, I place Eagle in a high position on our watch list, and would look to initiate a position on a drop below $10/share. The potential downside would be a serious decline in the prices of oil going forward. With a payout ratio of under 80 percent seemingly assured provided crude remains above $75/barrel, this is unlikely in the near- and intermediate-term.

I believe that Eagle would compliment our current position in Freehold Royalties Ltd. (OTCPK:FRHLF).

For those wishing to do additional research, Eagle's website can be found here.

Disclosure: I am long OTCPK:FRHLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information presented in this article in no way constitutes a recommendation to buy or sell this trust.