Energy Still Pays Off

11/11/2008 11:40 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of Canadian Edge, finds this company’s steady dividend highly attractive.

Although producing energy is a volatile business, Peyto Energy Trust (TSX: PEY-UN, OTC: PEYUF) has been a model of stability.

Peyto’s focus differs from that of other trusts in two major ways. First, it’s focused exclusively on developing its own properties in its chosen area of expertise—unconventional “tight gas” properties—rather than acquiring those of others.

That’s paid off with operating costs that are a fraction of other trusts, as well as a reserve life based on proven reserves (90% or better chance of development) that’s longer than ExxonMobil’s at 16-plus years. Finding, acquiring and developing costs (FD&A) are also a fraction of rivals’ costs.

Second, Peyto has consistently focused on paying a sustainable dividend rather than the highest it possibly could. The payout was increased 7.1% this year but, according to management, solely because of its success increasing reserves (Peyto’s yield is currently 15.9%—Editor ).

The first-half 2008 jump in oil and gas prices, in contrast, was treated as a windfall to boost cash reserves and finance needed development. Operating costs in the second quarter were trimmed 4.5% per barrel of oil equivalent produced, and output was slightly lower.

Like all oil and gas trusts, Peyto sold its energy in the second quarter of 2008 at prices above current levels. And despite hedging, there’s bound to be some negative impact on cash flows in the second half of the year, particularly with natural gas 83% of the trust’s overall output. Barring a much deeper plunge in gas, however, distributions will still be comfortably covered by cash flow, thanks to cost discipline of earlier years and relentless growth of low-cost reserves.

All of Peyto’s efforts to date have been located in Canada’s Deep Basin, an area of very high potential resources. Management claims total potential reserves in the region are twice those of the whole Barnett Shale region of Texas.

Moreover, in contrast to shale gas, the company’s Cardium play—which accounts for one third of gas produced in that region and 60% of overall profits—has been a proven resource in development for a decade. The company believes it is only in the beginning stages of developing this find as well as several others.

Even an energy production business managed for stability is affected by energy price swings. But for conservative investors looking to garner a big yield, participate in an energy rebound and weather the current shaky times, it’s hard to find a better pick than Peyto Energy Trust, which is a buy up to US $20.

Subscribe to Canadian Edge here…

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on GLOBAL