A New Trust for the New Year
01/17/2008 12:00 am EST
Bryan Perry, editor of the 25% Cash Machine, says Canadian energy trusts are unloved and beaten down in price, and he finds one he thinks is a quality play.
We used to own several Canadian energy trusts, but they all were creamed when the Canadian government unveiled its plan to tax those trusts at the prevailing corporate tax rate of 35% starting in 2011.
At the time everything in the Canadian trust universe got hit by 20%—40% losses before a wave of bargain hunting and consolidation. Now, more than a year later, the sector as a whole is still trading considerably off its historic highs—even after a number of mergers were announced and consummated.
The ownership exodus from Canadian trusts persisted throughout 2007, but now the selling appears to be drying up and there are some real values. I view the sector as “blown out” over all the negative news, year-end tax selling, and general lack of investor interest following the tax code changes.
It’s looking as if 2008 will be a bargain year for, at least, a few of these high-paying assets.
There’s one that even looks good right now: Baytex Energy (NYSE: BTE), [which pays] out monthly dividends with a current yield of 11.5%. Baytex Energy is unlike the other income trusts we’ve owned, because its product mix is weighted heavily toward oil [rather than natural gas], which has been soft for the past two years.
The trust has an enterprise value of $2.2 billion and produces about 38,000 barrels of oil per day. At that production level, the trust has 11.6 years of reserves left, even if it doesn’t drill another well. As it stands, BTE plans to spend $150 million in capital expenditures to bolster production levels for 2008.
With a strong balance sheet, a debt-to-cash flow of approximately 1.5x, and more than $100 million in undrawn credit facilities, Baytex can easily meet its capital-spending targets for the current year.
Baytex Energy has given a whole new meaning to the phrase “low payout ratio.” At the end of the third quarter this key measure that determines how much of every dollar is paid out in the form of dividends checked in at an incredibly low 52%! The heavy weighting in crude oil production is really paying off huge for BTE, and the numbers show it.
And with 48 cents of every dollar going back into operations, it only seems logical that shares of BTE will trend higher during the coming year, and beyond.
As far as the Canadian income trust sector goes, the proverbial baby was truly thrown out with the bath water, and this makes the sector ripe for a couple of good and highly-selective picks to be found among the carnage. Because it has the fundamentals to back it up, Baytex is one of those select choices. Buy it up to $20 per share. (It closed Wednesday above $18—Editor.)