Which Energy Trusts are More Vulnerable to Distribution Cuts?

Despite weaker prices for oil and natural gas, Canadian energy trusts have held up very well so far in 2008. The trusts covered by UBS for example, have yielded a 19% return, compared to a 4% decline for the S&P/TSX energy index. Analyst Grant Hofer attributes this to the fact that many should be able to maintain their distributions and the income-oriented nature of the trust structure.

Looking for trusts with low payout ratios and strong balance sheets, he found that Vermilion Energy Trust (VETMF.PK), Crescent Point Energy Trust (CPGCF.PK) and Bonavista Energy Trust (BNPUF.PK) stood out. Progress Energy Trust (PGN) has more debt, but also has a low cost structure and a low payout ratio.

On the flipside, the analyst highlighted Harvest Energy Trust (HTE) and Pengrowth Energy Trust (PGH) as having relatively weaker balance sheets and higher payouts.

In terms of potential distribution cuts, Mr. Hofer believes most trusts could maintain their payouts even if the commodities they produce fall another 15% to 20%. He told clients that Vermilion, Crescent Point and Progress are in the best position to do so, with Enerplus Resources Fund (ERF), Pengrowth and Harvest most vulnerable to a potential cut. In fact, the analyst added, these three names may have to adjust their distributions if prices remain where they are.

Comments

[NOWHEREMAN:]

None of them will cut dividends if they did not do so before the spike in oil/ng.

You haven't included the overall earnings increase that the Canadian Dollar's decline will add on conversion. Pay outs have already declined in Dollar terms.

Hurricane Season won't end for another, what?, 6 weeks or so. Do you expect overall mild winters without a bad one again?

2008 Sep 12 04:35 AM

[blackjacky2k:]

can't say for other names, but I did not see PGH increase its dividends when the oil went on a climbing trip, why would it cut it now that oil has returned to $100??

in addition, the current payout rate of dividends were established when oil was at $80 and NG was at $4.

is there something i am missing here?

2008 Sep 12 08:52 AM

[NOWHEREMAN:]

no, you aren't missing anything. Way too many generalities though.

2008 Sep 12 09:02 AM

[beabaggage:]

who would ever believe anything any analyst had to say?? especially UBS, watch ING take them over, they are idiots.
Good point about divs being paid when Oil/NG much lower. I bot my Canroy portfolio when the oct 06 tax bomb hit (AAV,PGH, HTE,PWE, PWI( guess what, Dubai bought me out the last time the shorts drove prices down!) OGN.UN fund and recently added a lot of PVX since they sold their US assets to reduce debt/improve CN grown)
I can't believe the cash generated with good gains in a Safe country.
CN interest rates are low, may go down, so debt wb easier to service.
HTE has that refinery, a gem of an asset in a safe country which can market to EU or Africa at low trans cost. AAV coining money, deciding what to do with it.
Also don't forget the good hedging these Canroys do to protect divs/cash flow. A lot of new profitable hedges put on in the Oil/NG spike.

Analyze your OWN stocks, do due diligence and make money.

2008 Sep 12 09:18 AM

[beabaggage:]

Also I bet with the economy slowing in CN too, thje tax issues will resolve themselves before 2011.

2008 Sep 12 09:19 AM

[Clearlead:]

PGN is a utility not an energy trust, and it is located in the Carolinas and Florida. Huh?

2008 Sep 12 09:28 AM

[mikesall:]

Harvest is less likely than most to cut..They did not enjoy much of the benefits of the price rise of oil (due to large hedges), and thus their cash flow be less affected than most by the oil price decline.. They also earn about one third of their money from refining, which last quarter was a disaster, but this quarter has improved considerably. Currently the crack spread is over 3 times what it was at the low.. Their cash flow this quarter will exceed the last..

2008 Sep 12 09:35 AM

[NOWHEREMAN:]

Who is Grant Hofer? What is his track record and why were his out of context statements chosen by this blogger? Why not just show the entire analysis?

Grant Hofer might have had something to say about PGN but we'll never know what.

2008 Sep 12 10:43 AM

[Steven Ward:]

Balance sheets are important but a so so balance sheet can be maintained without serious consequence if commodity prices hold up well or production increases continue to come on stream.

Vermillion, Crescent Point, Daylight, ARC and Advantage Incine Trust as relative standouts for production increases. Vermillion has the added kicker of owning a chunk ov Verenex which is probably sitting on a 4 billion BOE oil discovery in Libya.

2008 Sep 13 11:24 AM

[snowskier:]

Enerplus just increased their monthly payout in September after paying out the same rate (in Canadian dollars) for over 3 years. I can't see them cutting that monthly distribution in the near future after it took so long for them to determine revenues safe enough to raise it. I can't imagine them taking a chance on that kind of embarassment.

2008 Sep 15 08:20 PM

[phillyguy:]

Clearlead is correct. PGN is Progress Energy (an utility), not Progress Energy Trust.

2008 Oct 03 02:15 PM

[mapmakerdude:]

I own HTE, PGH, and PVX. I love the dividends. I like Cananda. I don't think the 2011 tax will do much harm. I think the energy trust will do fine, especially when inflation takes hold and the free market destroyed overly leveraged companies that do not have the cash to survive. I think I'll buy more CANROYS, as they are really cheap now!!!!!!!!!!!!!

2008 Oct 07 05:30 PM

[macsmart:]

ERF has always had a very conservative payout ratio, making it one of the most stable canroys.

2008 Dec 10 12:19 PM