High Yields from Energy Trusts

04/01/2005 12:00 am EST


Carla Pasternak

Editor, The Income Investor

"Looking for yield but scared of risk?" asks Carla Pasternak, editor of High Yield Investing. "Then energy trusts offer some of the highest yields around." Here’s, she looks at two of her favorite NYSE-listed trusts, Pengrowth Energy and San Juan Royalty.

"Pengrowth Energy (PGH NYSE) is one of North America's largest energy trusts. For the past 15 years, the company has been selling oil and gas produced from an ever-expanding portfolio of Canadian oil and gas properties. With production about equally weighted toward oil and gas, the company stands to benefit from a price rise in either commodity. Pengrowth's oil and gas reserves have an average lifespan of 10.6 years, one of the highest among Canadian energy trusts.

"Pengrowth has been an aggressive buyer of new reserves over the years, and higher production volumes should enable the trust to grow earnings and dividends even if energy prices decline. But for now, the trust continues to enjoy the best of both worlds - record high commodity prices and steady production growth. Pengrowth pays an attractive $2.24 per share annual dividend (in US dollars), which equates to a yield of 10.3% based on current share prices. Dividends are paid monthly. The company follows a fairly conservative dividend payout rate, paying out only 85% of available cash flow. Management uses the balance to fund future growth. Pengrowth has an outstanding long-term track record for delivering shareholder gains.

"San Juan Royalty Trust (SJT NYSE) is one of the largest of some 30 US royalty trusts. It gets its name from its 75% stake in 152,000 acres of natural gas lands in New Mexico's San Juan Basin. The trust exists only to pay dividends. It doesn't even drill the oil and gas reserves it sits on. That's done by parent company Burlington Resources. With about 98% of the trust's income coming from natural gas, San Juan is a pure play on rising natural gas prices. Since US energy trusts aren't allowed to replace reserves, the best investments are those with long-life reserves. San Juan passes muster here, as its 4,000 natural gas wells contain reserves of over 240 billion cubic feet of natural gas, enough for at least another 10 years of production.

"The main growth driver for SJT will be continued strong natural gas prices. Despite volatile natural gas prices over the past several years, the trust has delivered a healthy five-year earnings growth rate of over 25%. With an annual payout of $2.84 per share, San Juan currently offers a dividend yield of 7.9%. Formed in 1980, the trust has been paying monthly dividends for 17 consecutive years. San Juan's shares have soared 79% in the past year in tandem with natural gas prices. However, with a P/E of just 16 times earnings, SJT is still trading at a considerable discount to its peers."

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