Natural Gas Bid Positive for Canadian Royalty Trusts

Includes: BTE, HTE, OBE
by: Peter Everds

It has been an interesting year so far in Canroy (Canadian Royalty Trusts) land.

The RTEN, the Canadian Royalty Trust Index, is up a little over 4% in the new year. Since the sector is yielding a little bit more than a point a month, it is up roughly 6.5%. Obviously in this tape that is very good.

This compares very favorably to the Oil Service HOLDRs ETF (NYSEARCA:OIH) which is down 20 and is currently trading at 168ish. The XNG is flat on the year even though it was up 18 this week and is now trading at 574.

The sector produces 60% natural gas [NG] and 40% crude futures [CL]. Thus the seasonal NG bid is helping to push the sector up. There are some interesting investors like Gartman that have gotten long the NG trusts recently. He is short CL against this. A bit of an ouch on the short side of this trade.

Here is a snippet from an article I wrote for Seeking Alpha in December:

Even in Canadian dollar terms, the increases in natural gas [NG] and crude futures [CL] are significant. On November 20th, Don Vialoux estimated that the price of crude in Canadian dollars had gained roughly 28% from the low in August. He also estimated that natural gas in Canadian dollars had gained 46% from the beginning of September.

The NG pricing continues to be very beneficial for the Trusts. The canroys are going to have really good numbers for 4Q and 1Q numbers are going to be even better.

Currently NG 12 month strip is at 9.15 and is higher than it was at any time in 2007.

If NG drawdowns for the rest of the withdrawal season match the five-year average, storage will finish at 1.357 tcf, This is significantly below last years ending inventory in the 1.566 tcf range This would be 9 percent above the five year avg. However, this is the last week in which NG comparables YOY are going to be tough. This weeks draw is going to be solid. Reuters estimate: 131 bcf to 169 bcf versus a 228 bcf. However, Robry's model as of Thursday night is already at 143. If we have any cold after next week. That will put a dent in and could put a large dent in the 5 yr avg..

It is shaping up to be a possibly very compelling year for energy trusts. In a market where there are all sorts of quirky yield equities that have all sorts of bizarre backdoor credit risks. Simple commodity based energy trusts could become very interesting to investors.

Disclosure: Author holds positions in CPG.UN, BTE, PWE and HTE