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!”

Top Pick Canroys Based on Discount to Net Asset Value

The March 7, 2008 issue of the CIBC Oil & Gas Royalty Trust weekly report has a Net Asset Value matrix for most of the Canadian Oil & Gas Trusts (Canroys). I like to buy Oil and Gas Trusts based on Net Asset Value (NAV) since all these business's are selling the same product. There are other metrics to consider. However, NAV is a good base to start from.

Based on NAV my Top Picks are as follows;

Advantage Energy (AVN.UN-T $10.85) Trading at a 26% Discount to NAV of $14.75
Paramount Energy (PMT.UN-T $7.86) Trading at a 18% Discount to NAV of $ 9.62
Baytex Energy (BTE.UN-T $21.00) Trading at a 12% Discount to NAV of $23.96

The discounts reported are based on March 7, 2008 closing prices.

Members of our mailing list will be emailed a copy of the CIBC report.

Please perform your own Due Dilligence.

In interest of full disclosure I own units in all three of the above Canroys.

Natural Gas Weighted Income Trusts

Natural Gas Weighted Energy Trusts have been decimated since the "Tax Fairness" policy was announced on October 31, 2006.

Despite the spike in trading activity year-to-date, unit prices still remain depressed for Trilogy Energy Trust (TET.UN-T) and Paramount Energy Trust(PMT.UN-T). February 2008 to-date, Paramount’s unit price is 46% below its pre-Tax Fairness level and 43% below for Trilogy. Peyto Energy Trust (PEY.UN-T) and Progress Energy Trust (PGX.UN-T) have fared better, and currently exhibit average prices only 9% and 12% below their pre-Tax Fairness levels respectively.

Investors seeking the most exposure to increased natural gas prices should consider both Trilogy and Paramount. Trilogy has the highest cash flow sensitivity to natural gas given its unhedged production, while Paramount’s cost structure (both operational and financial) provides leverage but 25% of their production is hedged.

I presently have positions in Paramount and Peyto.

When The Sun Doesn’t Shine and the Wind Doesn’t Blow We Need Natural Gas

When the sun doesn’t shine and the wind doesn’t blow, we need natural gas. Until new plants are approved and built for clean coal and nuclear, we need natural gas. If we want to subsidize agriculture, we need natural gas to convert food crops to energy. To supplement oil that faces increasingly short supply, we need natural gas. Finally, if hydrogen is going to be the last clean fuel, it will likely be created from natural gas.

Natural gas weighted Canroy's have natural gas selling at half price, judging by the incremental price of liquefied natural gas in Asia. Last week, according to trade reports, Japan paid $18 a million btu for the liquid form of the same commodity that is priced in the futures market at $8 for the next six years.

Since $18 LNG is roughly equivalent to $100 oil burned in the same Japanese power plants, the stark difference points to an upward price trend for the clean fuel.

Meanwhile, monthly distributions are likely to be higher in 2008 judging from the trend in the price for natural gas prices.

I have been buying NAE.UN, PMT.UN and PWT.UN.

NAL Oil and Gas Trust -NAE.UN-T- Has Interesting Exploration Upside

RBC reports that Q3 Results are good with 45% production from natural gas and 55% from oil.

At the close of the third quarter 2007, NAL had 650 boe/d of production ready to be tied in, which will occur in Q4 2007. Furthermore, NAL is primed to increase its production as a result of a number of development projects now underway.

The next milestone are the three high impact Seneca Wells which are getting closer . The results of three high impact wells from the Seneca acquisition are nearing release. Depending on the outcome of the three Seneca wells, NAL should have further development potential opportunities with its partners.

RBC's target price and Rating Unchanged. RBC are maintaining their 12-month price target of $12.25 /unit, and an Outperform but RBC have not included the possible results of the three new wells.

We believe NAL has an interesting mix of exploration and development prospects converging in 2008, which could prove financially rewarding to patient investors.

I had a large position in NAE in 2006 but I sold it all because of the Halloween 2006 Tax Fairness Plan massacre.

Presently, NAE has has a $0.16 per month ($1.92 per year) distribution resulting in a yield of 15.6%. The payout ratio 69% and the payout ratio including capital expenditures is 114%. This Trust has some exploration upside potential. With a +15% yield you get paid to wait. Hopefully we not only get our distibutions but some capital gains potential too.

Now that is investing for income!

Verenex Energy Q3 Results- $19 Haywod Securities Target

Verenex Energy (VNX : TSX : $10.65)

Verenex issued their third quarter results. They spudded their seventh well in Libya. However, they don't expect cash flow from their Libyan discoveries until late 2009.

Haywood Securities maintains "sector outperform", 12-month target price is $19.00.

This is one of two "none income" producing holdings at this time. A safer way to play Verenex is by holding Vermillion Energy Trust (VET.UN:TSX) which is Verenex's largest sharholder. Vermillion pays out $0.17 per month and is trading around the $40 mark.

Verenex will be very volatile until they actually start production and can publish accurate reserve calculations. Please conduct your own due dilligence.

SDT.UN Lost 3.3% of Net Asset Value for Existing Unit Holders

SDT.UN reported their Net Asset Value (NAV) as of November 1, 2007 as $5.06 per unit. The NAV on October 25, 2007 was $5.23 per Unit. This represents a dilution of $0.17 or 3.3% to the existing unit holders as result of the share exchange offer they recently completed.

This is unfair and shows that management cares more about itself then unit holders.

As I said in my last post, all the benefits of professional management are accruing to the manager and not the investor.

SDT.UN is now trading at a 10% discount to Net Asset Value which is the normal range since the October 31, 2006 Income Trust melt down caused by the new Government of Canada 31.5% tax on Trusts. This explains their recent weakness.

I plan on slowly unloading my units in SDT.UN and develop my own diversified holdings. I may not do as well as Sandy McIntyre but I will probably beat him on a total return basis due to Sentry Select's disregard for its unit holders.

SDT.UN is no longer one of my top picks. Keep watching the BLOG as I will update my Top Picks selection shortly.

Paramount Energy Trust - PMT.UN-T - New Top Pick

I picked up 5,000 units of Paramount Energy Trust (PMT.UN-T) for Under $8 this week. This is a risky pick because its 99% natural gas production.

Natural gas prices in Canada are very low and not very profitable.

However, Paramount has reduced their pay out to $0.10 per month ($1.20 per year) which results in a greater than 15% yield.

According to BMO research Paramounts "all-in" payout ratio is under 100% (all-in means cash distributions plus capital expenditures to maintain production) which means this trust is sustainable and high yielding.

If natural gas prices do recover then investors will see a nice capital gain. BMO's target price is $10 per unit. If paramount gets to $10 within a year then investors are rewarded with a total return of 40% (15% yield + 25% capital gain).

Now thats investing for income!

Please do your own due dilligence.

Freehold Royalty Trust is Another Buy and Hold Security that Yields 11.70%

Freehold Royalty Trust - Symbol: FRU.un on the TSX

My 12 month target is CDN $16.00 /unit

Freehold Royalty Trust is roughly 65% weighted to oil, which will protect it from variation in natural gas prices.

It has a Low level of foreign ownership and a strong balance sheet.

Its presently trading at $15.39 per unit. It pays a $0.15 distribution per month ($1.80 per year) which results in a yield of 11.70%.

You won't get rich with this one but you won't go broke either.

The Yield fits nicely into our investing for income strategy. I feel this is a buy and hold type of security.

I don't own any units at this time.

Arc Energy Trust is a Great Buy and Hold Income Producing Security

ARC Energy Trust - Symbol: AET.un on the TSX

My Target is CDN $22.50/unit over the next 12 months

ARC's assets are diversified throughout the Western Canadian Sedimentary Basin and production is balanced between oil and natural gas.

One of the more attractive investments in the Canadian royalty trust sector due to asset quality and longevity, an experienced management team and reasonable valuation relative to the peer group. Arc is a favourite of the institutional investors.

Arc has small production growth potential with Carbon Dioxide flooding in the old fields. I suspect that some of the "socially responsible" and "green" funds may use this as a rationalization to acquire units.

Arc Energy trust is trading at $21.70 and pays $0.20 per month ($2.40 per year) yielding 11.6%.

I don't have any units at this time.

Why Baytex Energy Trust is One of My Top Picks

While Baytex’s Q2 financial results were impacted by higher costs and lower realized heavily oil prices, we were encouraged by the solid production numbers. In particular, development of its Seal heavy oil asset is progressing well.

Unlike some other operators in the area that are having inconsistent results from new wells, all of Baytex’s Seal wells continue to meet expectations. The lack of infrastructure is constraining major development at the property due to high transportation costs, but infrastructure investment by other operators appears to be ramping up.

I believe that as development of Seal progresses, further value will be attributed to the asset and reflected in the trust’s unit price. Furthermore, the Seal heavy oil reserves could he worth over $40 a share to a major Oil company like Shell.

In the meantime Baytex is paying out $0.18 per month ($2.16 per year) for a yield of just under 12% while you wait for the big buyout offer.

Now that's investing for income at its best!

Top Pick Verenex Energy VNX-T Presently Trading at $12.30 with a 2008 target of $18

Verenex Energy (VNX-T) is 45% owned by Vermilion Energy Trust(VET.UN-T). They are drilling in Libya. Drilled 2 wells so far. The first one flowed 10,000 BOE a day and the second flowed 20,000 BOE.

Verenex hit an all time high in August of $17.63 but has pulled back considerably since the ORCA well drilled by Bordeux Energy (BDO-X) off the coast of France (they had a 30% interest) came up dry.

I normally only accumulate dividend paying stocks and stay away from risky stocks such as Verenex because its purely an oil exploration play in Libya. However, they have struck oil and I expect that in in 2008 Verenex will also become a production company too. Once this happens it will attract different investors and valuations.

I feel that it will reach $18 by the end of 2008.

I picked up 2,000 shares.

Please do your own due dilligence before acquiring any securities.

I have not Changed my Holdings

I have not published in awhile but rest assurred that I have not changed my holdings.

My largest positions are the same picks I have been advocating over the last 6 months.

Bought More Harvest & Crescent Point Today

Today I bought 2,000 units of Crescent Point (CPG.UN-T) and Harvest Energy Trust (HTE.UN).

I also bought 1,000 units of Vermillion Energy Trust (VET.UN-T) too.



Disclaimer;

We are not investment professionals. We often post our own opinions and identify them as such, we reserve the right to change our opinions. The fact that we sometimes disclose when we establish or sell a position in a company is no warrantee that we will publish every trade. We do not warrant that any information that we post is true beyond the fact that it came from whatever source we acknowledge. We may at anytime have or not have an interest in a stock that we discuss. Finally we advise every investor to perform their own due diligence on both the investment products they purchase as well as the people whose opinions or decisions they accept about investing.

Picked up 1,000 EIT.UN on Thursday April 5, 2007

I picked up another 1,000 units of EIT.UN last Thursday before the market closed. I could not resist the 13.5% yield and a 14.5% discount to net asset value plus I get a diversified portfolio of over 60 income producing assets.

I am surprised how weak these trusts are but I am still hanging in there.

EIT.UN-TSX and SDT.UN-TSX Clobbered

My two largest holdong Enervest and Sentry Select Diversified Exchange Traded income funds got clobbered today.

This is primarily due to the government announced they will tax Hotel and Retirement REITS operating income.

I am anxious to see the Net Asset Values of these two trust ETF's tomorrow morning.

I suspect the NAVs may be up.

Firm Crude & Natural Gas Prices May Boost Energy Trusts

Firm Crude Prices May Boost Energy Trusts

Firm oil prices should provide the catalyst to kick-start the next upleg in energy stocks.

Oil and Natural gas prices have remained remarkably firm over the past few weeks despite declining growth expectations and increased market volatility. Recent price action suggests that, after dropping 35% from its July 2006 high, oil prices may have completed their corrective phase.

While a slowing U.S. economy remains a risk, strong Chinese demand should help maintain the floor under crude prices.

If so, investor confidence in this commodity should begin to restore as global growth concerns ease, providing the catalyst to trigger another rally in energy plays.

After consolidating for almost a year, the energy sector does not exhibit the overbought properties of most other markets. Bottom line I am going to start loading up on energy trusts.

Harvest & Crescent Point Energy Trusts Have High DRIP Participation

I was reading an RBC report today and noticed that Harvest and Crescent Point Energy Trusts have the highest DRIP (Dividend Re-Investment Plan) participation rate of the Oil and Gas Trusts.

Crescent Point has 30% of their dividends re-invested and Harvest Energy has 43% of their distribution re-invested.

This tells me that the shareholders have long term confidence in the management of these two trusts.

This is another reason why both of these trusts are my top picks.

Sold 1,000 Units of EIT.UN today

I sold 1,000 Units of EIT.UN today.

I wanted to free up some cash to invest in some oil & gas trusts during the shoulder season correction.

Please note that I may not always tell you what I am buying or selling.

Please perform your own due diligence and refer to our disclaimer on our web site.

Even Good Stocks Get Clobbered During Selloff

Good investments fall with the bad during a selloff. Some investors were surprised that dividend paying stocks and income trusts fell during last week’s crisis. Normally income producers are a refuge.

The problem is that when there’s a big stock market panic, investors often have to raise cash to pay off margin accounts, and that causes them to sell good dividend paying stocks.

Income investing is still a good place to be in today’s uncertain markets.

My top picks (see the web site) still stand.