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Steady production supports high payout
Posted By Pat McKeough On October 8, 2010 @ 8:46 am In Aggressive Investing,Royalty trusts,The Successful Investor | No Comments
PENGROWTH ENERGY TRUST $11 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 291.3 million; Market cap: $3.2 billion; Price-to-sales ratio: 2.1; Dividend yield: 7.6%; SI Rating: Average) is one of North America’s largest energy royalty trusts. Its main properties are in Alberta, B.C. and Saskatchewan. The trust also holds interests in other energy projects, such as its 8.4% stake in the Sable Offshore Energy Project, which operates three offshore-drilling platforms south of Nova Scotia.
Roughly 60% of Pengrowth’s production is natural gas. The remaining 40% is oil. Investors see this a negative in light of today’s low gas prices. However, a colder-than-normal winter could cause gas prices to shoot up again. Pengrowth’s focus on proven properties with large reserves and predictable production rates also tempers its risk.
Pengrowth’s revenue rose 83.2%, from $955.3 million in 2005 to $1.8 billion in 2008. The jump was largely due to acquisitions, including the $1 billion of properties Pengrowth bought from U.S.-based oil company ConocoPhillips in January 2007. However, lower oil and gas prices caused the trust’s 2009 revenue to fall 44.2%, to $977.4 million.
Despite the higher revenue, earnings fell 28.4%, from $2.08 a unit (or $362.3 million) in 2005 to $1.49 a unit (or $262.3 million) in 2006. Thanks to the ConocoPhillips properties, earnings rose 50.9%, to $395.9 million in 2008. Pengrowth typically issues new units to pay for acquisitions. As a result of more outstanding units, its earnings per unit rose 6.0%, to $1.58 in 2008. In 2009, earnings fell 79.8% to $0.32 a unit (or $84.9 million).
Cash flow per unit fell from $3.93 in 2005 to $3.15 in 2006, but jumped to $3.65 in 2008. In 2009, cash flow fell 42.7%, to $2.09 a unit.
Pengrowth continues to expand through acquisitions. In September 2010, it bought the 82% of Monterey Exploration Ltd. that it did not already own for $366 million of units, which it issued to Monterey investors. Monterey produces oil and natural gas at properties in Alberta and B.C.
Pengrowth plans to spend $65 million to develop Monterey’s promising Groundbirch unconventional gas field in northeastern B.C. Unconventional fields cost more to develop than regular deposits, but can last decades longer. The trust will spend a total of $350 million on exploration in 2010.
Pengrowth’s units trade at a high 32.4 times its depressed 2010 earnings estimate of $0.34 a unit. However, they trade at a much more reasonable 5.1 times its forecast cash flow of $2.17 a unit.
The trust will convert to a corporation before Ottawa starts taxing income trusts at the start of 2011. Pengrowth has $2.7 billion in tax pools it can use to offset the new taxes. As a result, it plans to maintain its current annual payout of $0.84 a unit, for a yield of 7.6%, for several years.
Pengrowth is a buy.
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