When considering oil and gas trusts, the returns going forward and whether to hold the trusts long term or to take some profits, I would also suggest you look very closing at the long term bond rate. Many people have moved into trusts reflecting a move towards yield. That is why Bay Street is selling as many of the IPO trusts as they can to take advantage of the enthusiasm of the retail purchaser. As a result of the recent price moves, the yield on some of the trusts have gone down. RBC estimated yields of between 11.1% and 13% on average based upon $22.50 oil and $3 for natural gas for the O&G trusts for 2002 (ARC, NAL, Freehold, Pengrowth, Enerplus & Prime West)and the price of all these trusts have moved up since the report was released. The assumption and discussion on this thread focuses on commodity prices and the assumption is that only the price of oil and gas will dictate the price. While commodity price is very important, the trust unit price will also be affected by the rate of return in the bond market. If the bond market goes down (ie. rates are rising), this will drive down the price of the trusts. All the economists assume that inflation will not be significant and see little increase in rates. I am not so sure and I worry about seeing higher interest rates by summer. Simple math but if a bond is yielding 5% (ie. $5,000 on a $100,000 bond), if the market demands 6%, the bond will be trading at $83,333 for a decline of value of close to 17% (unless you hold to maturity). The 1% increase in interst rates represents a demand by the market for 20% more in return. If oil and gas income increases by 20%, then perhaps the trust prices hang in there. If not, prices may go down. The trendline in interest rates has generally been down since 1995 (spiked up in 1998 & 99). If all the fiscal stimulus by the Federal Reserve brings inflation or increasing interest rates, the market value of the trusts could be adversely affected. In my world, taking profits and preserving capital is not a bad thing so I have started and will be in the process of selling 1/3 to 1/2 of the trusts I own. I am not suggesting anyone follows suit but I do think you should consider the effects of interest rates on the price of the trusts. Good luck with you investment.
TommyD |
