NCE: Trust This Energy Trust

09/05/2003 12:00 am EST

Focus:

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

"We buy natural gas stocks in summer for sale in the depths of winter when gas prices spike higher," says Tobin Smith, editor of ChangeWave Investing. Smith notes that "the natural gas crisis this winter appears as predictable as another blackout." Here, he adds a new energy trust to his natural gas buy list.

"NCE Petrofund (NCN NYSE) is among the creme de la creme of the Canadian gas trusts. They have royalty trust holding interests in gas and oil producing properties. It has everything we want in a trust:  It has high Canadian ownership of over 59%. This means it should not have problems being a trust that US investors can hold--very important. It has a sector-leading 14.4-year reserve life--a number I think is conservative. I'm guessing that it is closer to 16 years. NCN just closed a new acquisition with an estimated life index of more than 20 years--typical of the long-lived reservoirs available in Canada.

"In addition, they are adding active new reservoirs of up to 200% of production each year with 40% or so of total cash flow. This means they have leverage to maintain high cash flow. (Now is a good time to remember that for every $1,000 in dividends you get in your taxable investment accounts, that only about 10% of the distribution is taxable. This makes the equivalent pre-tax yield over 20% a year. There is not a better income vehicle anywhere.)

"The payout ratio of 56% means NCE Petrofund is reinvesting a lot in new reservoirs. NCE Petrofund had a 14% increase in production during the second quarter of 2003, and I look for this trust to rise substantially as new reservoirs come on stream. Expect the trust's capital to grow $200 million a year as their yields and reserves grow, too. It's a very sweet combo, indeed, when you only get 4% from a 10-year bond and have to pay taxes on all the interest at your current tax rate. This is a keeper. I've been researching this one for a long time and now we're ready to get on board. Buy NCE Petrofund under $12 for a target of $20."

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