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Thursday, December 20, 2007

Harvest Energy Trust Recommended at These Levels

Harvest Energy Trust: Kicking Out Healthy Distribution
by Peter Everds

Harvest Energy Trust (HTE) is a Canadian Royalty Trust with upstream and downstream operations.

As many of you may know, HTE cut their distribution recently and their units, which were trading at $28.96 in early November, got a big haircut and are now trading around $20. At current prices, the trust is yielding 17.5%.

Right now the market is not acknowledging the bottom line cash flow increases because of higher crude and NG pricing, not to mention the increase in the crack spread.

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.

We have seen a number of Investment Banks, including Merrill Lynch (MER) and Goldman Sachs (GS), start to revise their CL price decks up in the last couple of weeks and this will help HTE's estimates. Moreover, the price decks are being upped by pretty hefty amounts. FBR (FBR) just upped their 2008 CL price $20, from $60 to $80 per barrel.

The kicker for HTE is the refinery. After 2 months of maintenance the refinery is running at full capacity. The 312 crack spread has been trending higher, more than doubling in the last 8 weeks. It has gone from a low of around $7 to the current price of $14.61 At one point this year the refinery was contributing roughly 55% of cash flow. The refinery will start contributing substantially to the bottom line as seasonal pressures lead to an increased crack spread.

We are starting to get seasonal upgrades in refiners: For instance: "Bank of America raises Refiners to Buy from Neutral; Raises 2008 refining margin outlook"; Valero Energy (VLO) raised to Buy from Neutral; Price Target raised to $80 from $68; Western Refining (WNR) raised to Buy from Neutral; Pri ce Target raised to $38 from $35

The 3Q payout ratio [POR] was 86%. Under the reduced distribution, the POR would have been roughly 70%. This is pretty reasonable considering how bad the quarter was. 4th quarter POR, with the refinery limited for 2 months, should still be in the 70s. In the "if everything goes swell category", 2008 2nd quarter POR could be in the 50s, compared to 2007's 2nd quarter POR of 63%.

Technically, HTE is at 3 year lows and the RSI and MACD are indicating HTE is oversold (surprise). There is a nice little gap in the 25.5 area. The chart is very similar to HTE's chart last year including the November gap down. Hopefully, the results will be the same with the strong rally though the first half of the year.

Insiders have bought 36,000 units since the mid-November announcement of the distribution cut. If you want a refiner that is kicking out a healthy distribution, Harvest might be worth taking a look a

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