Trust Sector Offers Upside With MLP Convergence

The Canadian Income Trust sector offers upside with MLP convergence.

The following is an excerpt from a UBS report issued in June 2007.

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Assuming that a trust signals its intent to convert to an MLP sometime this year,we believe there should be further upside for Canadian investors. We are forecasting a one-year total return of 16% for our coverage universe, which includes the average cash yield of 11.0%. Our valuations incorporate premiums for the MLP conversion, biased toward those trusts with NYSE listings and higher proportions of U.S. ownership.

In the absence of our MLP thesis, the stocks appear fully valued today, reflecting an appropriate premium for the income relative to conventional E&P peers. Based on our net asset value analysis, we estimate that the trusts in our sector are discounting commodity prices of US$50-55 per boe, which compares to the 2008 forward strip of US$61.50 per boe.

These commodity prices imply the sector trading at 110-120% of their blow-down net asset values (i.e., a discounted cash flow reflecting the production of only existing booked reserves), which we believe is appropriate based on our conservative NAV analysis.