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"Trust" in Enerplus
06/09/2006 12:00 am EST
"The biggest mistake an investor can make with Canadian royalty energy trusts is to look only at the dividend yields with little regard to their underlying businesses," says Paul Tracy. Here’s he looks beyond just the yield to find favorite in the sector.
"Often, the trusts with ultra-high yields are fundamentally weak in some way. As a result, their distributions are likely to be unsustainable. Important considerations to keep in mind when buying trusts are the payout ratio, which measures the percentage of a trust's earnings that are paid out as distributions and its manageable debt. In addition, we look at reserve quality.
"In addition, while it's not hard for US investors to buy Canadian stocks, we tend to prefer trusts that are listed both in Canada and on one of the major US exchanges as American Depositary Receipts, or ADRs. For US investors, these trusts are easier and cheaper to purchase. With these points in mind, one of our favorites is Enerplus Resources Fund (ERF NYSE)
"Founded in 1986, Enerplus is Canada's
oldest royalty trust focused on oil and natural gas production. It's also
currently the largest trust in Canada in terms of both production and enterprise
value. It has been one of the most successful trusts when it comes to
renewing its reserves and sustaining its distribution growth. It has achieved
this reserve growth through a combination of new exploration within its existing
properties, as well as via acquisitions of existing proven reserves.
"One growth driver we see for ERF is the so-called oil sands. To date, virtually all of the company's reserves and production have come from conventional oil and gas reserves. However, the oil sands are an important component of Canadian oil production. Canada has by far the largest reserves of oil sands in the world, and many analysts believe this resource will be key to increasing Canada's oil production in the coming years as oil from conventional sources gradually dries up.
"The trust's steadily rising production and reserve base support a solid
dividend payout. The company has been able to steadily increase its production
per outstanding unit and similarly its monthly distributions. The firm's current
distribution stands at about $4.50 per share annually, giving the stock a yield
of around 8% based on recent share prices.
Although you wouldn't guess it by looking at the firm's sizable annual payout, ERF remains highly conservative when it comes to paying distributions. Its lower payout ratio spells a lower overall dividend yield—still high at 8%— but it also makes ERF one of the least commodity-sensitive trusts in the energy business. Even if oil and gas prices retreat significantly from current levels, ERF has a large enough cash cushion to maintain its impressive dividend. Meanwhile, if oil and gas prices continue their strong uptrend, then ERF should have plenty of room to boost its distributions in the coming years."
At worst the tax cuts will validate current market valuations, says Tom Essaye. At best they’l...