Oil Price Helps Trusts Sustain Current Rate of Distribution

Just as income stocks are resisting market decline relatively more, oil the commodity is also doing better than stocks in general when measured by current price to 200-day average. Both features are combined in buy-recommended Canadian Oil Sands Trust (COSWF.PK), which announced on July 29 a 25% distribution increase for the current quarter over the previous quarter.

Encore Energy Partners (ENP) and Permian Basin Royalty Trust (PBT) also have estimated distribution yields around 12% a year that are responsive to oil price. The three conventional production Canadian Income Trusts are more concentrated on oil as well. Those trusts, including buy-recommended Penn West Energy Trust (PWE), have hedged away some of the gains in oil price and are applying the rest to reinvestment. The blessings of today’s oil price make it more likely that the conventional trusts will be able to sustain the current rate of distribution in their corporate form when taxation of Canadian trusts increases in 2011. Trusts with high concentration on oil are those with low concentration on natural gas.

Originally published on August 1, 2008.

Comments

[NOWHEREMAN:]

Don't expect an increase from PWE, they are about to sell "non-core" assets, IMHO they will be sold at a paper loss. Additionally, their increased debt load will require higher servicing costs. They say the sales will be used to pay down Bank Debt, I believe this.

My question is why weren't the Bond sales used instead? They will continue to produce losses on the bottom line but will maintain the dividend for the foreseeable future, 6-12 months down the road or until oil prices climb to levels where they are no longer able to generate losses.

Look for another Company purchase like an AAV which has forward hedges on which losses can be taken.

I am long PWE.

2008 Aug 28 09:33 AM

[Rayn:]

I, too, am confused by PWE's sale of 'non-core' assets. After all the acquisitions and the debt incurred in doing so, this seems to be a conflicting strategy. It makes me wonder what is going on.

Long PWE.

2008 Aug 28 09:44 AM

[Jack Yetiv:]

The idea of selling non-core assets is to get rid of assets providing a low ROI and replace them with something that offers a better return. For example, maybe these 16,000 barrells of production represent high-cost production due to their geology or location.

One speculation--PWE made the non-core asset deal a month or two months ago, when commodity prices were much higher. They may be able to replace those non-core assets with others at a lower price, and in places that "fit" their E & P activities better.

Until we know the terms, it's impossible to know if this sale was stupid, brilliant or somewhere in between.

Jack

2008 Aug 28 01:44 PM

[oroloco:]

Jack, thanks for clarifying things, as usual, in your informed and insightful manner.

2008 Aug 28 02:16 PM

[January Thaw:]

Good Article...I am long a number of CanRoys...but they sure can give you gray hairs sometimes...still, that's life in the oil patch...

2008 Aug 28 09:38 PM

[Steven Ward:]

Regardless of PWE's reasons for selling she is having trouble raising production and the dividend payout.
An estimate by CIBC WorldMarkets places an additional 300 to 400 million a year over the next 5 years over and above the current 900 million in development drilling and exploration PWE currently expends. People are just fascinated by the dividend in this stock when more viable and profitable alternatives exist in Crescent Point Energy Trust, ARC Trust, Advantage Trust, Triliogy Trust and Daylight energy Trust where all habve raised production and payouts the last year and have strong projections going forward as well.

Most have had significant to good price appreciation over PWE on unit prices as well. this is where PWE is losing ground on total return.

2008 Aug 29 12:22 PM