Get Paid to Wait for NatGas Rally

05/05/2010 10:57 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

A second-generation Canadian trust yields 12% from less than half this year’s profits, writes Roger Conrad in Canadian Edge.

Paramount’s (Toronto: PMT-U, OTC: PMGYF) decision to [convert from tax-exempt Canadian trust to a corporation without cutting its dividend] hadn’t been anticipated by the market. In fact, with the natural gas-focused producer’s units still yielding more than 12%, it’s likely few had been paying much attention.

The result is another opportunity for more aggressive investors to take a piece of one of the most innovative energy companies in Canada at barely half the value of its assets in the ground.

Every producer’s cash flows are ultimately tied to energy prices. But Paramount’s aggressive hedging has set up a projected 2010 payout ratio of just 42%, leaving abundant cash to continue paying off debt and funding the company’s always unique development program.

Early this month, the company dramatically enhanced its efforts at the latter by closing a previously announced C$126 million acquisition of properties in west central Alberta. Financed with an issue of units at Paramount’s best price in some time, the properties have current daily production of approximately 10.1 million cubic feet of natural gas and liquids (1,685 barrels of oil equivalent). Importantly, some 20% of output is from light oil, by far the highest priced fossil fuel in the current environment.

If the light oil reserves are developed, it will be Paramount’s first foray into something besides natural gas production. It will hardly be the first innovative move made by [chief executive officer] Susan Riddell Rose, the daughter of a Canadian energy industry legend who continues to chart a profitable course for Paramount despite some of the most adverse industry conditions ever recorded.

The trust, for example, continues to earn a tidy sum in government subsidies from simply not developing the gas reserves it owns that are located on top of known sources of bitumen used in oil sands production.

It hasn’t been easy being a Paramount unit holder the past several years. Both the unit price and distribution amount have been shaved roughly 80% since the early 2006 peak, which coincided with the spike in natural gas prices that followed hurricanes Katrina and Rita.

The good news is today’s distributions and unit price are based on natural gas prices that have fallen equally far. That leaves a lot of room for up side, even as the company is prepared to weather further weakness.

To be sure, Paramount isn’t for the faint of heart. Nor is this a great play for impatient investors, as recovery will depend on what happens to North American natural gas prices, which are still in a deep slump. Management’s action on corporate conversion and, more importantly, the dividend are clearly keeping the faith that the company intends to stick to its core business of developing high-percentage reserves in its own way—and sharing the spoils with investors in the form of a high cash distribution.

Buy Paramount Energy Trust up to US$5. [Shares closed at US$4.84 over-the-counter Wednesday—Editor.]

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