Larry Bellehumeur

Canadian Energy Trusts Look Cheap: Harvest Is Well Positioned

To reiterate some of the previous comments, I don't see Finance Minister Flaherty changing his tune on the 2011 Conversion. He said so in a Press conference last week. The Liberals have discussed how they would change things, but I think when they saw the tax losses of some of the larger Corps moving over to Income Trusts, they too would panic.

I do agree that things look good for 2010 and beyond for the Canadian Patch....I just think that there is no rush to buy any of them. I do like PetroBank, but don't like some of their South American exposure.

I never really did like the Income Trust model for many Intermediate Oil companies, as it is more suited for larger producers in my mind (the Pengrowth, EnerPlus and Penn Wests of the world). I'd still prefer a large cap with good Oil Sands exposure, like Suncor (small position in).

Cheers
Larry

Canadian Energy Trusts Look Cheap: Harvest Is Well Positioned

Good article in theory, but you missed way too many key points.

1) The Alberta Royalty regime changes have been a major hit to many companies, in regards to the Cash Flow from their existing wells (there has been some relief for certain depths on the new wells). This has been part of the reason for the downfall, as Stelmach has not softened his stance to the extent that the Patch wants.

2) The Federal Government's proposed changes to the Income Trust structure in 2011 have left many of these companies in doubt, regardless of what tax pools Harvest may have built up. The usual feeding system was for a company such as this to be taken over by a Canadian Major (EnCana/PetroCan, etc), or by a Foreign company looking to add to its reserves. Without the mechanism, it will be tough to see a good long term for Harvest.

3) While the costs have come down in Western Canada, the Drilling costs are still quite high, as well as many of the Services (Fracturing, etc). The current prices (at least in Alberta) still make it prohibitive. While they have properties in Kindersley, this isn't enough to balance out, as that area is using the same drilling services out of Red Deer, Alberta.

4) While I haven't personallly analyzed Harvest, I have heard many Analysts talk about their high leverage, which is not good in this time of the Credit Crunch.

There are much better plays out there than Harvest. Companies such as Crescent Point (Bakken play, I have no position) provide a better return, and less exposure to Alberta. Another option is a company such as Canadian Oil Sands (no position) that has already settled their Royalties issues.

Personal Disclosure -- I live in Calgary, and have most of these companies (including Harvest) as customers.