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Saturday, July 19, 2008

UBS Analyst: Energy Trusts Offer Exceptional Value

The way Grant Hofer sees it, even when you lose you win.

Mr. Hofer, the UBS Securities guy crunching data on royalty trusts in Calgary, thinks now is the time to take a good look at the group. The trusts he covers are down 8% over the past month (but still up 34% this year), and Mr. Hofer thinks “the sector appears to us to be very well positioned and offers exceptional value today.”

Cash yields, he says, have climbed 10.7%, which makes the trusts attractive, given payout ratios of about 50% in 2009. His numbers are based on $120 per barrel oil and $10.10/mcf for natural gas. Don’t think those prices are reasonable? No sweat.

In bold, he wrote:

Should commodity prices continue to pull back, we believe that the yield should provide attractive support for unit prices.

Vermilion Energy Trust (VET) and Crescent Point Energy Trust (CPGCF.PK) were his two favorites on Thursday, given their high weightings to crude oil and growth plans and because of their acquisitive ways.

Mr. Hofer’s target on Crescent Point is $45, and he expects Vermilion to get to $49. Vermilion, he thinks, will be “essentially debt-free” by the end of the year. “With its low payout ratio, 75% weighting to crude oil (unhedged), and sector-based netbacks, the trust remains our best overall pick in the sector.”

For those of you who like to dig deeper into the numbers, Mr. Hofer notes the trust group is trading at just 83% of net asset value.

He said:

This is the lowest level that we can recall (typically the sector trades at a premium to our conservative NAVs).

When analysts get excited, they (sometimes) come up with eye-catching headlines for their reports. Looks like Mr. Hofer falls into that category on this one. At the top of his report, he wrote: “Valuation update: Back up the truck!”

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