Harvest Energy Trust (HTE.UN : TSX : $29.62) - Buy - Target: $31.00
Bruce McDonald
Comment: Raising target price due to rising refinery margins
Refinery crack spreads have been rising significantly due to recent refinery outages. Harvest generates approximately 35% of its EBITDA from the North Atlantic Refinery. We have increased our EBITDA estimate for North Atlantic from $319 million to $377 million. Under the NYMEX forward strip, we now forecast 2007E cash flow of $7.37 per unit, representing a payout ratio of 62%, and a debt to cash flow ratio of 2.2 times.
Based on a conservative multiple of 5.0 times EV/EBITDA, we estimate the value of North Atlantic at $1.9 billion. The upstream business is trading at 5.8 times 2007E EV/EBITDA under the forward strip, compared with an average of 6.6 times for average large cap royalty trusts.
We maintain our BUY recommendation and have raised our 12-month target price from 29.00 to $31.00 due to higher refinery cash flow estimates. Our target price is based on a 2007E EV/EBITDA multiple of 5.0 times for the refinery business and a 6.0 times 2007E EV/EBITDA for the upstream business under the forward strip. Our upstream target multiple is a discount to the 6.9 times average target multiple for large cap royalty trusts, given Harvest's shorter upstream asset RLI.
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