Royalty trusts cash in on soaring gas prices
Returns hit 54% in 2000: Despite Tuesday's selloff, prices add up to huge gains
Claudia Cattaneo, Calgary Bureau Chief
Financial Post
Natural gas futures tumbled 13% on the New York Mercantile Exchange yesterday, in their largest
one-day slide to date as investors booked profits.
But the deep freeze that has been blowing energy prices through the roof across North America
continues to spell great news for shareholders of conventional oil and gas royalty trusts; their
spectacular comeback this year shows no sign of slowing down.
The partial income/partial commodity plays, which typically distribute to shareholders 80% of their
cash flow, should deliver an estimated 34% total return on average in the next 12 months (based
on a combination of income distributions and capital appreciation) if current trends continue -- on
top of this year's 54% total return, said Doug Sims, royalty trust analyst at Canaccord Capital
Corp.
Their outlook is buoyant both because high commodity prices will allow trusts to continue to pay
out healthy distributions, and because there's more room for unit prices to rise, said Mr. Sims,
who has "strong buy" ratings on ARC Energy Trust and Pengrowth Energy Trust, and buy ratings
on Enermark Income Fund and NCE Petrofund.
"I think now, especially because of the gas side, we will see another push on unit prices."
Natural gas surged across North America this week, reaching above $17 per gigajoule in Alberta
Monday and Tuesday -- more than five times last year's prices -- as frigid temperatures boosted
demand at a time when inventories are so low some analysts are predicting they'll fall to empty by
the spring. Crude oil also rose on expectations of higher demand for heating fuel.
"We are just starting to enter the winter season, [which] is appearing to be normal, if not colder
than normal," said Alice Sun, a senior analyst at Merrill Lynch Global Securities.
"The demand for fuel will be there to support oil and gas prices," said Ms. Sun, who has buy
ratings on ARC, Pengrowth, Enermark as well as Shiningbank Energy Income Fund, a smaller trust that has high natural gas
exposure. Even without taking into account capital appreciation, the trusts pulled off yields this year of 15% to 18% on
average .
After two years in the dog house, when trusts had to slash distributions because of low oil prices, conventional oil and gas
royalty trusts returned to the spotlight last spring.
"This is the safe place where the money ran to [after] the tech sector hit its highs," said Mr. Sims.
While high income and high commodity prices are obvious motivators, some retail investors also see them as a hedge against
high energy prices, said John Dielwart, president and chief executive of ARC.
Investors' confidence in the trusts has also increased because managers have been around longer, gaining experience in
managing the assets both through high interest rates and a low oil and gas price environment, said Ms. Sun.
"We [Enermark] are paying more distributions today than we did three years ago, when the stock was at $7.50, and now it's
worth $4.50," said Eric Tremblay, senior vice-president at Enerplus, which controls Enermark, as well as the Enerplus Income
Fund. "Now you've got a longer reserve base, so it's easy to replenish yourself, and it's a better product than it was three
years ago."
More support came from institutional investors, which have been purchasing the units for income funds.
"Institutions are starting to realize that we have a role in the oil food chain, as we develop and exploit more mature
properties," said Mr. Tremblay.
"We don't explore [but] we are a very active oil and gas company. The only difference [with oil and gas producers] is that
instead of taking 100% of my cash flow and use it to explore every year, I use only 20% of my cash flow to develop simple,
economically viable plays, which is enough to maintain myself every year. The other 80% I might as well pay out to
shareholders, which is what we do."
Conventional oil and gas trusts have outperformed Canadian oil and gas producers, successfully raising money while
producers didn't. Year to date, the TSE oil and gas producers index gained about 36%.
This powered trusts' acquisitions in the past year, as they bought both oil and gas properties and junior companies, whose
shares have been trading at around three times cash flow per share.
Three trusts -- Enermark, Pengrowth and ARC Energy -- now boast market capitalizations of more than $1-billion, making
them sizeable intermediate oil and gas companies.
Just in the past few days, ARC Energy Trust bid to take over oil producer Startech Energy Inc. for $485-million in shares and
assumed debt, raising the total value of its acquisitions this year to $620-million.
Pengrowth, which just purchased oil and gas properties from Canadian Natural Resources Ltd. for $128-million, raising total
acquisitions this year to $180-million.
And Enermark acquired assets for $700-million this year, including Cabre Exploration Ltd. for about $350-million.
"There is an an opportunity to buy entire companies much cheaper than assets," Mr. Tremblay said.
"Of course, when you buy a company, you get all their gems, you don't just get what they are trying to sell to alleviate a
balance sheet problem."
ENERGY TRUSTS ARE DEALING OUT FAT YIELDS:
Close Mkt. Cap. 1999YTD Annualized TrustTicker11-Dec-00Units
O/S(millions)DistributionsDistributionsYTD Yield
APF Energy
Trust AYun/TSE $9.75 7.0 $68.3$1.56$1.78 19.86%
ARC Energy
Trust AETun/TSE$10.85102.5 $1,112.4$1.35$1.91 19.20%
Enermark Income
Fund EIFun/TSE $4.38245.0 $1,073.1$0.62$0.84 20.92%
Enerplus Resources
Fund ERFg/TSE $22.60 19.6 $442.3$2.46$4.18 20.18%
Freehold Royalty
Trust FRUun/TSE $8.30 26.8 $222.5$0.78$1.12 14.72%
Maximum Energy
Trust MXTun/TSE $4.20 14.9 $62.4$0.00$0.00 0.00%
NAL Oil & Gas
Trust NAEun/TSE $8.35 26.9 $224.9$1.28$1.35 17.64%
NCE
Petrofund NCFun/TSE $5.80 65.7 $380.8$0.61$1.23 23.13%
Pengrowth Energy
Trust PGFun/TSE$18.50 63.7 $1,177.8$2.36$3.31 19.49%
Primewest Energy
Trust PWIun/TSE $8.70 51.9 $451.5$1.11$1.57 19.69%
Shiningbank Energy Income
FundSHNun/TSE$16.25 16.7 $271.2$1.60$1.76 11.82%
Viking Energy Royalty Trust VKRun/TSE $8.35 27.8 $231.7$1.16$1.40 18.29%
Source: Merrill Lynch Canada
ccattaneo@nationalpost.com |
