John Freund is a high yield specialist for Todd Shaver's BullMarket. Here, he looks at two of his cu...
The Time Is Now for 2 Natural Gas Picks
03/09/2012 9:30 am EST
This is a great time to get in on incredibly low natural gas prices and buy great gas firms cheap, writes Doug Fabian of High Monthly Income.
In the latest issue of the newsletter, I told you to get ready for natural gas. Well, today we are lighting up the pilot and turning up the BTUs in the High Monthly Income portfolio with two natural gas trusts.
In case you haven’t had a chance to review our discussion on the natural gas market, here’s a brief review...
Thanks to a warmer than average winter this year, demand for natural gas hasn’t been very robust. Combine that situation with a huge supply of natural gas, thanks to better discovery technologies and new extraction methods, and you have a classic combination of a decreased demand and an increased supply.
The result is a steep decline in the value per million BTUs. Rock-bottom natural gas prices mean that companies that produce and sell natural gas have had a tough go of it lately. This tough business climate is where I see the opportunity for us in this service.
You see, many natural gas producers are set up as royalty trusts, or pass-through securities, meaning that they funnel their profits to shareholders via high dividends. With these funds coming under pressure due to adverse price fundamentals, the falling share price of these funds translates into big yields.
Our thesis here is that taking positions in natural gas trusts that have been hurt by falling prices and that still are offering big dividend yields is a fantastic, low-risk buying opportunity. That opportunity could very well morph into some exceptional upside, once the metrics in the natural gas space recover.
To take advantage of this situation, I want you to buy the following two natural gas trusts: Enerplus Corporation (ERF) and San Juan Basin Royalty Trust (SJT).
I want you to buy each respective position with 5% of your total High Monthly Income dollars, and that will give you a total of 10% exposure to natural gas trusts. Our official buy price in both funds will be based on their respective closing values on March 1. Here’s a quick look at each of these natural gas firms:
This company owns both oil and natural gas properties located in western Canada, in the provinces of Alberta, British Columbia, Saskatchewan, and Manitoba, as well as in the United States in Montana, North Dakota, Maryland, Pennsylvania, West Virginia, Wyoming, and Utah. Enerplus’ properties consist of approximately 42% crude oil and natural gas liquids, and 58% natural gas.
Enerplus shares are down about 8.5% in 2012, and that decline has set us up for a nice low-risk buying opportunity. It also allows us to collect a very robust 9.07% dividend yield.
San Juan Basin Royalty Trust
This trust has a 75% net overriding royalty interest in the properties of Burlington Resources Oil & Gas Company LP. Those properties are located in the San Juan Basin in northwestern New Mexico. The underlying properties are primarily natural gas producers.
San Juan Basin shares have dropped about 20% in 2012, and that makes this fund an extremely low-risk buying opportunity at current levels. And, at a current yield of 7.2%, we also can get paid nicely to own the trust while waiting for the share price to reverse course.
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