Jack Yetiv

CANROYs Remain Attractive as Oil-Related Investments

I'm embarrassed to tell you that I cannot recall why, but I don't like ERF as much as I like PWE and PVX. About a month ago, I re-reviewed my picks, and concluded I liked PVX/PWE better.

Based on my hazy memory (double-check me on this), I believe ERF had a higher payout ratio this quarter that either PWE/PVX, while offering a bit less dividend. ERF's RLI (Reserve Life Index) and/or tax pools may be somewhat less, as well.

Of course, I think all of these Canroy's will do well if oil stays over $100 and nat gas doesn't go lower than it is right now. They all will suffer if the contrary comes to pass.

jack

CANROYs Remain Attractive as Oil-Related Investments

Georealist brings up a good point, which I have made before but want to emphasize:

If you criticize my basket of recommended stocks in the past year (CSIQ, PWE, TSL, PVX and SOL, plus HTE for a while but NOT now), which overall, are probably up 15% after Friday's run in SOL and TSL, then you have to tell me what is better.

If your "better" is to be in cash, that's fine, but "cash" has made people what, 3% in the past year?

Jack

CANROYs Remain Attractive as Oil-Related Investments

I can never "explain" market irrationality, Paultaut. The fact is that PWE delivered what I expected it to deliver, and if PWE was worth $30 when its "free" cash flow was far less than zero and its payout was over 70%, I reasoned that if free cash flow went to $100 million this quarter (which was the amount I was modeling, it actually came in at $123 million), the stock should go to $40 this quarter.

To look at it a different way, whatever percent risk there was 6 months ago that PWE would not maintain a dividend of $4.08/year has DECREASED substantially as payout ratio has dropped from over 70% to about 50%. It will continue around 50% as long as oil does not drop below $100, and I think most people believe it won't.

Therefore, a stock that had a 20% risk (let's say) of the dividend being cut and now has a 5 or 10% risk or being cut and a decent prospect of being raised shouldn't be more valuable?

I'm sorry, Paultaut, but my money projections for PWE were spot on (look at the cross-arguments between David Bui and I three months ago, and look at his recent article on PWE results). My stock value projection has turned out to be waaay wrong, but not because either my facts or analysis were wrong. I have asked people here and elsewhere to point out with SPECIFICITY what FACT or analysis was wrong in my article, and nobody has done so. On the contrary, this quarter's results have borne out my projections.

Finally, what I just said about PWE applies equally to my TSL articles. TSL has done all that I expected it to (financially speaking), and more, yet the market has decided to give it a 25% haircut from where I recommended it. Again, my money projections were right on, but the stock has tanked (of course, other solars have tanked more).

My predictions on SOL and PVX are in the money (SOL is up almost 50% in the three or four weeks since I recommended it at $13.54), primarily because I ended up buying them after the big drop in the oils and solars. But that's as much luck as anything else because I could have easily bought these stocks when I bought TSL andf PWE, and they would have also been underwater.

The point is, I try very hard to get my facts straight and to provide a logical analysis. As we have seen, what the market does with those facts is often far different than what I think the market should do with those facts. BUT, value will be recognized, and since I do not buy stocks that I will ever HAVE to sell, I can wait out the market's irrationality for a loooong time.

Let's see what happens with TSL and SOL this Mon and Tues.

Jack

CANROYs Remain Attractive as Oil-Related Investments

rrgcsfb--

Thanks for the CNN link on the oil sands. Yes, they state that the oil sands are "profitable" at $50, but did they include cost of the lease, infrastructure buildout, and externalities such as water, what to do with the waste water and sand, environmental recalamation costs, CO2 production, etc?

Also, how much "profit" was included in the $50? My guess is that if you include all the externalities (as Canada is doing more and more every day), and you add a profit premium due to high capital costs up front and uncertainties of return on that investment, you will find that not too many companies will buy and develop oil sands leases if all they project they will get is $70 or $80.

Remember that if oil gets to $70 or $80, it also increases the possibility that it may go down to $60, which further raises uncertainty and decreases the likelihood of a good return on investment.

Bottom line--if oil goes to $80, SOME marginal production (or anticipated production) will cease to be produced, which will help correct the down move in oil.

Jack

CANROYs Remain Attractive as Oil-Related Investments

Herve, I'm not sure what numbers everyone else here is reading, but PWE DID have a blowout quarter.

Funds flow was a RECORD $753 million, 131% up y-o-y. On a per-unit basis, FF was $2.00/unit, up 46% from Q2 '07. Netback was $47.84, 52% higher than Q2'07.

The funds flow covered ALL of the dividends ($383 million, payout ratio of 51%, I think the lowest in company history, and one of the lowest among ALL the Canroys reporting Q2'08, with PVX being one of the few exceptions at a payout ratio of about 43%, as I recall) PLUS ALL of the capex ($247 million), leaving $123 million in what I call "free" cash flow, whereas in Q2'07, the $326 million in funds flow covered dividends of $243 million (75% payout ratio) but barely touched the $484 million in capex.

If that is not a blowout quarter--one of the few times in the history of the Canroys where funds flow fully covered dividends and capex and left a substantial amount over--then you have to tell me what you expected and how PWE failed to deliver.

As to Paultaut, I will not respond to him--he's waaay too angry, for reasons that are unclear to me but irrelevant for the purposes of this blog. I will respond to any non-emotional challenges that focus on what this blog should be about, such as the one by Herve.

What I will say is that HTE, which Paultaut seems to prefer, has dropped about twice as much as PWE from the where I initially recommended PWE (around $30). Its payout ratio is still far higher than PWE or PVX, and I would continue to stay away from it because I am more concerned about refining margins than I am about price of oil.

I think refining margins (especially for gasoline) will stay pinched even though decreases in oil prices should theoretically help refiners.

Jack

CANROYs Remain Attractive as Oil-Related Investments

This blog isn't about me defending my "calls" as wsigler and paultaut appear to think. My goal when I write here is simply to share my analysis based on facts. I believe I have achieved that goal in my writing. If I have not, tell me what I have missed.

What characterizes both of these writers is they criticize me without explaining how (1) either my facts were wrong, or (2) my analysis was wrong, nor do they tell us how THEY have done in their investments in the past year during which both the Nas and the Dow have dropped about 20% and the financial system has nearly imploded twice.

In fact, contrary to paultaut and wsigler's assertions, the recommendations they complain about which I have made are UP more than 10% percent in the past year, which is FAR better than most money managers have done in the past 12 months.

CSIQ is up about 60% from where I recommended it, TSL is down about 35%, SOL is up 25% from where I bought it about 2-3 weeks ago, PVX is up about 6% from where I bought it about a week ago, and PWE is down about 7% (but given dividends, I'm about break even).

And TSL announces earnings this coming Mon, while SOL announces Tues. Let us reevaluate my performance on Tues.

But even if their criticisms about my "terrible" stock picking were not factually incorrect, I find paultaut's and wsigler's comments useless unless they tell me (and everyone else) where I went wrong--ie, where my FACTS or ANALYSIS were wrong A PRIORI (not after the fact).

With all due respect to the "consensus" here, I remain very comfortable with a stock (PWE) that is yielding 15% and is extremely likely to continue to do so unless oil goes below $80 and gas under $7.50. If any of the criticizers have a better idea than parking money in a stock that will return 15% almost guaranteed, speak up, I sure want to know about it.

Jack

CANROYs Remain Attractive as Oil-Related Investments

As to the DRIP, no, I have not taken advantage of it because I like to time my purchases, and because it's a bit more complicated to do when a broker holds your shares.

Finally, Mr. Paultaut. He always bashes me and my Canroy recommendations--while telling us how he has made money buying Canroys. In his latest rambling comments (ie, what do his panic attacks have to do with investing?), he criticizes me for not admitting that I was "wrong." He is referring to articles I wrote several months ago expecting that PWE may well hit $40-50 by the end of the year.

First, the end of the year isn't here yet, so I am not "wrong" just yet. Having said that, although it is not impossible, I now no longer expect PWE to hit $50 by the end of this year after having observed what happened to the Canroys as oil ran to $150 and nat gas over $13. In a word, "not much." Sure, PWE ran to $35, but that is trivial in the face of oil and gas prices that would have more than tripled PWE's free cash flow (cash flow left after paying dividends and capex).

I think $40 is within reach by the end of the year if oil remains where it is today and nat gas strengthens closer to $10, which could well happen with one hurricane or if the summer turns hot again. If neither of those happen, I think PWE will remain in the upper 20's and low 30's.

Further comments later on.

Jack

CANROYs Remain Attractive as Oil-Related Investments

Thanks for the comments. As to GM bonds, I am not familiar with the specific issue, but I am worried about the whole US auto industry, so personally, I would avoid. Not an informed opinion--but my 2 cents' worth.

Tax changes in 2011--whatever their impact will be--are already priced into the Canroys, and investors' perception of same partially account for these companies' terrific yield. Several things to keep in mind. First, most of these companies have "tax pools" that will keep them tax free beyond 2011--up to 2014 in PWE's case, as I recall.

Second, if oil in 2011 is still well over $100--as many people expect it to be--PWE will still be paying about 15% on its current price, even if it converts to a taxable corp or an MLP.

Third, many people expect that oil might well go to $150 or more by 2011. Although I cannot intelligently guess what oil will do in 3 years, if oil does that, expect PWE, PVX and their brethren to be paying a yield in excess of 20-25% on today's purchase price. Since that yield is unrealistic, the stock price will increase by 50% to bring the yield down to 13 or 14%.

Finally, there may be a strange effect when 2011 rolls around and investors realize that the Canroys are doing fine. Yields might actually DROP to a more reasonable 10%--which means the stock prices will climb. This would happen when investors realize that dividends will continue to be paid and that the Canroy businesses can operate just fine in a taxed environment. This would be especially true, of course, if commodity prices are high in 2011, as many (including Mr. Kingsdale) expect.

Therefore, 2011 (or 2014) changes do not concern me very much.

Further comments below.

Jack

High-Yield Canadian Royalty Trusts: What's the Catch?

I expect that several--if not most--of the trusts mentioned above, will report record earnings in Q2, which will begin to be reported next month.

In addition, I think the reports will indicate that future production, which was being hedged last year at $60-80, is now being hedged at $130 or even more, meaning that even if oil DROPS from $140 to say $120, earnings in 2008 and 2009 will actually INCREASE.

My favorites are PWE and AAV, and I look for 10-20% moves on both in the next 30-60 days.

Jack Yetiv

Is Harvest Energy Trust's Premium Valuation Justified?

Good article and good comment. I would like to highlight a few additional points:

1) HTE's realized oil prices in 2007 are somewhere around $70, and natural gas was also relatively low. As they renegotiate their hedges in 2008 and beyond, there is little doubt that this number will move up to $80 or even more given that most experts are now starting to believe something I have believed for years, which is that we would reach $100 oil in 2007-2008-or 2009, and that it would stay between $90 and $120 in 2008 and probably rise to $150 over the next few years (see my recent SA article on the topic of OPEC's plan for oil prices).

At 55,000 bbl/day production, a $10 increase in price per barrell is half a million of windfall profit PER DAY, which is about $50 million per quarter. The same applies to natural gas, which for various reasons, is also likely to trend upwards (in fact, nat gas will probably go up faster than oil just to catch up).

2) A dividend yield of 15% is outrageous for a company that has little downside risk (in terms of cutting the dividend). At 30 cents per share per month, my guess is that the distribution ratio in 2008 will be around 70%. Since income is unlikely to do anything but go up in the future, it seems downside risk is extremely limited. The value of this dividend is even greater in a dropping-Fed-rate environment.

3) As oil prices go up and stay up, HTE's 2 billion barrells of hard-to-extract oil become more economically viable and hence, more valuable, increasing the company's book value and enhancing sustainability.

In summary, this is a company that offers a relkatively secure 15% div yield (which is subject to favorable 15% tax treatment under US tax laws), and whose profits are almost guaranteed to go up on an annual basis over the next few years.

What's not to like?

Jack Yetiv