Put Your "Trust" in Roger

07/08/2005 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Looking north of the border for high yielding energy plays is gaining significant interest among US investors. One advisor at the forefront of this trend is Roger Conrad, the first to launch a newsletter focused on this increasingly popular arena. Here's a look at  Canadian Edge.

"Penn West Energy Trust (CA:PWT.UN Toronto) (PWTFF Other OTC), a newly launched energy trust, stands head and shoulders above the crowd. Shareholders voted for the company to begin trading as a trust on June 2, 2005, receiving three trust units for each common share held; Penn West Energy Trust began trading with 163,138,268 units outstanding. Unlike most newly minted trusts, Penn West has numbers you can sink your teeth into. The trust has set its initial monthly distribution at 26 cents Canadian per unit, for a payout ratio of about 60% of its cash flow.

"From an operations perspective, Penn West is well positioned; its realized price for oil and gas is in line with industry averages. Penn West derived some 50% of its 2004 production from crude oil and natural gas liquids, of which light to medium gravity crude made up about 65%. The remaining 50% of production came from natural gas. Its reserve mix is comparatively healthy; Penn West has proved reserves of 637 billion cubic feet of natural gas, and a reserve life of proven oil reserves of 8.2 years.

"The one potential fly the ointment is operating costs, which at C$7.75 per barrel of oil equivalent (BOE) are in the middle of the pack among its peers. Converting to a trust, however, may be just what the doctor ordered on this score, offering potential efficiencies. With powerful fundamentals behind it and paying a yield well in the double-digits, it’s still arguably trading at a discount to its peers as investors try to sort through the details of the conversion. In my view, that makes now a good time to jump in. There's plenty of liquidity and any broker should be able to buy shares for you. Overall, PennWest is one of the best-positioned trusts. Buy up to US$30.

"Meanwhile, the oilfield services sector hasn’t historically been known as a font of high dividends. But dishing out a monthly distribution well north of 10%, Peak Energy Services (CA:PES.UN Toronto) (PKGFF Other OTC) is doing its best to break the mold. The decision to go trust, beginning in May 2004, was a step in management’s goal to become a dominant player in its region, providing immediate cash flow for further expansion. The firm provides an integrated array of oil field services to energy producers in Western Canada. These include leasing drilling rigs and providing related services involved with energy production.

"The profitability of the energy services business depends on two major factors: high energy prices, which encourage energy patch activity, and the relative supply of field services equipment. As long as oil stays comfortably at more than $35 or so a barrel, as looks likely for the next few years, the Canadian energy patch will continue to boom. And with the energy services business only now emerging from a multi-decade depression, rigs and service provides alike remain in relatively short supply. That adds up to a double play on the energy bull market.

"The biggest risk with buying Peak now is that its business is cyclical. Should oil prices slip to $40 or lower during the summer, Peak shares are likely to slide along with them, despite the trust’s built-in protections and low payout ratio. As long as oil and gas remain in a long-run bull market, however, any near-term losses will be dwarfed by ultimate gains. Buy up to US$8 for an eventual ride to the low to mid-teens in the next 12 to 18 months."

Related Articles on