Three Solid Energy Trusts for 2009

01/26/2009 1:00 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, associate editor of Personal Finance, says Canadian energy trusts have sold off big, and have moved to counteract a much-feared tax increase in 2011.

The first half of 2008, Canadian income trusts were among the biggest winners in the global stock markets. Then came the unraveling of the US financial system and a more than 40% crash in the Standard & Poor’s 500 index.

The broad-based Toronto Stock Exchange Income Trust Index fell from a midsummer high of nearly 180 to an early December low of 84.46 before rebounding recently to around 90. For US investors, the drop was compounded by a rapid weakening of the Canadian dollar’s exchange value with the US dollar.

Yet relatively few trusts trimmed distributions in 2008. In fact, considerably more increased payouts and promised further bump-ups for 2009. Well-run individual trusts reported very strong third-quarter earnings and issued solid guidance for the fourth quarter and 2009.

The key question for 2009 is which trusts will keep running well until overall economic and market conditions improve. Those that can will be at much higher prices a year from now.

Interestingly, the approach of 2011—when trusts will be taxed as corporations—has dramatically receded as a threat to value. There’s speculation the ruling Conservative Party will submit a proposal for a new trust-like structure in its next budget. Meanwhile, the leading opposition party Liberals support rolling back the maximum 2011 tax on trusts to 10%. Even if neither happens, trusts are already charting their own course to remain high dividend payers as corporations.

Of the three energy producing trusts, Vermilion Energy Trust (TSE: VET-UN; OTC: VETMF.PK) is in the best position vis a vis 2011 taxation, thanks to a very low payout ratio, almost no debt, and the fact that 70% of income is generated outside Canada. These earnings aren’t subject to 2011 taxation, as they’re already taxed in the countries where they’re earned.


ARC Energy Trust (TSE:AET-UN; OTC: AETUF.PK), Enerplus Resources (NYSE: ERF), and Vermilion also have considerable non-cash expenses that accrue and can be used dollar for dollar to cut tax liabilities. And all three have affirmed their intent to remain big dividend payers well after 2011.

Rather, all three trusts are in line for big gains when energy prices stabilize and buyers return to the sector. That may still be some months off. But the bursting of energy’s bubble last year has made a new price surge inevitable when global economic conditions stabilize. The recent catastrophic fall in prices has already cancelled scores of energy expansion plans and will discourage new development for some time, as producers are sure to remain skeptical of any price surge.

Buy ARC up to US$20, Enerplus up to US$30 and Vermilion up to US$30. (ARC closed above $13, Enerplus below $22, and Vermilion at around $20 Friday. ARC and Vermilion trade on the less liquid Pink Sheets, but can be bought on the Toronto exchange—Editor.)

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