Much has been written on the Canadian Oil and Gas Royalty Trusts in the last year or two. Much of what has been written was in regards to the taxation of the Trusts beginning in 2011. Generally, we believe this is overblown hype and has simply served to drive prices of the shares to extreme lows.
The price levels of all the Trusts have been beaten down not only because of the 2011 taxation issue, but also because of the sharp declines in crude oil and natural gas. We ask the question: how low does a Trust price have to fall and how high do the yields have to rise to make the risk/reward adequate to begin purchasing some of these Trusts?
We would argue that a Trust yielding 15-20% with a good history and a reasonable expectation of a future ability to maintain their monthly payouts represents a good long term (3-5 years or longer) portfolio holding.
We have recently been purchasing Provident Energy Trust (PVX). With the volitility in these issues, we find it beneficial to 'average in' our purchases and thus have bought 5 times in the last month at an average yield of near 20%. We chose PVX for more than just fundamental reasons. First it trades on the New York Stock Exchange, which gives us great liquidity when buying or selling, meaning we get a fair price. Secondly, PVX has options available on a major options exchange in the United States.
Our general reasoning on the purchase of Provident Energy Trust shares (PVX) is that while in the near future oil and gas prices may fall further, as the worldwide economy gets back on its feet, hopefully by late 2009, the fundamentals will justify much higher prices. Additionally while we are awaiting higher prices, we will be collecting a nice monthly dividend (even if it gets cut in half).
One last kicker is that we sell out of the money calls against our position which sweetens our returns nicely (of course the shares can get called away if the shares rise--but we can either buy the calls back in or repurchase the shares as the situation warrants).
Lastly, there is one overlooked variable in the case of Provident Energy and that is the fact that Provident has built a 'tax pool' that will allow it to avoid taxation until at least 2016. Most of the Canadian Royalty Trusts have been building these pools, but it is either not recognized or not understood---thus we get the extreme bargains in the share prices.
Much of the same reasoning as mentioned above can be used for Pengrowth (PGH) and Penn West Energy (PWE)--we simply have chosen Provident Energy (PVX) to execute our strategies.
Disclosure: Author holds a long position in PVX, no position in PGH or PWE