Good Substitutes for Energy Trusts

06/18/2007 12:00 am EST

Focus:

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says master limited partnerships are alternatives for battered Canadian energy trusts, but he finds one of the latter he recommends as well.

I have had Kinder Morgan Energy Partners (NYSE: KMP) on our buy list for several months, with little success catching a dip to buy into. The limited partnerships have run since the big blowup with the Canadian trusts, and apparently a lot of energy trust money has migrated to the Master Limited Partnerships (MLPs).

Kinder Morgan is still a favorite. I am raising my buy price to $52.50 where it will yield a bit over 6%. (It closed at $54.30 Friday.) Kinder Morgan has had a history of raising their dividends, and in time, we will see the yield grow. There are plenty of energy MLPs out there, but I like Kinder Morgan as well as any of them at this point.

You do have to be prepared for some extra work at tax time if you buy an MLP. Nevertheless, MLPs—and Kinder Morgan in particular—are investments that you should consider.

Although we hold several Canadian energy trusts on our recommended list, I am still reluctant to advise putting more money into them at this point. They have recovered since last fall, but much of that is due to the Canadian dollar’s recovery.

If the Canadian government had not opted to tax the trusts, I believe the trusts would all be selling at new highs. I realize that a lot of things can change between now and 2011 when the tax is slated to go into effect. Perhaps the government will change and come to its senses. I doubt it. Unless [the trusts] can pay big dividends, new money will be tough to come by. We are seeing some appreciation in our dividends once converted to US dollars, but for the most part, we are not seeing much in the way of increasing revenues or reserves—even with higher crude and natural gas prices.

There is one exception, and that is Peyto (TSX: PEYUN). They are a bit of a 50/ 50 company in that they hold back part of their revenues for further exploration and development; they then pay the rest to the unit holders. Peyto could easily convert back to a corporation with minimal adjustment to their business model. The yield is decent at 7.9%. They possess some internal growth potential, unlike most of the other energy trusts, and they give us a nice hedge against further erosion of the US dollar.

I am reinstating Peyto with a downside buy price of C$18.50. (It closed just below C$20 on Friday.) Peyto is worth owning, either as a trust or a corporation. The trusts are enticing with those big dividends, and although we recommended selling a couple of them, we still have several positions. With the exception of Peyto, I cannot advise [putting] new money in this sector at this time.

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