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Sunday, April 8, 2007

Sound Energy Trust-Very Tempting

I presently hold 5,000 units of Sound Energy Trust (SND.UN). I plan on acquiring additional units as funds become available.

However, the "street" does not like management so I would not expect much capital gains in this investment until commodity prices firm up and the company has some reasonable quarterly reports. However, the 18% yield pays you to wait for the capital gains which will eventually come.

Below is an opinion posted on Investor Village message board which reflects my views.

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SND's most recent guidance was EXTREMELY impressive for a company yielding around 18%.

"It remains our objective to be known as a low-payout trust, and with the distribution cut effected beginning in March 2007, we estimate our payout ratio to average approximately 50 percent for the year. Based on price assumptions of US$55.00/bbl WTI and $7.00/Mcf AECO, our cash flow projections for 2007 are $78.1 million. These funds will enable us to cover distributions of approximately $43.0 million and capital expenditures of $31.3 million without issuing additional equity or increasing our debt levels. "

So SND's all-in POR (capex plus distributions) is projected to be around 95% using a very conservative price deck.

I don't know of a trust yielding anywhere near as much with similar sustainability.

Assuming that same conservative price deck, SND is trading for about 3.1 times cash flow (which is about as cheap as any trust in the sector, and tremendously cheaper than most. The only trusts comparably cheap on this basis are THY and TUI, both of which are total basket cases and understandably sector pariahs).

SND's NAV (as calculated by the company using a seemingly reasonable price deck and 10% discount rate) is 5.05, meaning that SND is currently trading at roughly a 23% discount to NAV. I believe that this is one of the very largest discounts to NAV in the sector.

SND will also be one of the best takeover candidates around when/if the Trust Tax is passed, thanks to their extreme undervaluation and very large tax pools. That's another reason to like the trust imho.

It was encouraging to see Chairman Boyce buy 50,000 units last week.
http://www.canadianinsider.com/coReport/allTransactions.php

That buy reinforces my opinion that SND is very undervalued at its current price of $3.92 and pays $0.055 per month distribution.

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