These two trusts should rebound in 2010

Lower oil and natural gas prices weighed on the cash flow and stock prices of these two resource trusts in 2009. However, recent announcements should improve their prospects in 2010.

PENGROWTH ENERGY TRUST $11 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 289.5 million; Market cap: $3.2 billion; Price-to-sales ratio: 1.9; Dividend yield: 7.6%; SI Rating: Average) produces oil and natural gas, mainly from properties in western Canada. Natural gas accounts of 60% of its production; oil supplies the remaining 40%. The extra exposure to gas has hurt the trust lately, as gas prices are down more than oil prices.

In 2010, Pengrowth will spend $285 million on exploration, developing its current properties, and buying new properties. That’s up 29.5% from $220 million in 2009. About 70% of this spending will go to oil projects, including $15 million for its Lindbergh oil-sands project. Lindbergh could account for 40% of Pengrowth’s reserves when it begins producing crude oil in six years. The trust will also spend $12 million on its the promising Horn River shale-gas discovery in B.C.

Pengrowth’s cash flow should cover these costs: In the first nine months of 2009, its cash flow was $401.4 million, or $1.56 a unit.

Despite the higher capital spending, Pengrowth’s average daily production will fall to around 75,000 barrels a day (including natural gas) in 2010. In the third quarter of 2009, it produced 78,135 barrels a day. However, part of the drop is because it sold properties that produce 1,000 barrels a day.

The units trade at just 4.9 times Pengrowth’s likely 2009 cash flow of $2.24 a unit.

Pengrowth is a buy.

PRECISION DRILLING TRUST $9.48 (Toronto symbol PD.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 275.6 million; Market cap: $2.6 billion; Price-to-sales ratio: 1.9; No distributions paid since February 2009; SI Rating: Extra Risk) provides contract-drilling services to oil and gas producers, mainly in western Canada.

Precision continues to focus on cutting its debt following its $2-billion purchase of U.S.-based contract driller Grey Wolf Inc. in late 2008. The trust recently repaid $75 million U.S. Its long-term debt now stands at $899 million (Canadian). That’s a manageable 35% of its market cap.

Lower energy prices hurt demand for Precision’s drilling services in 2009. In response, the trust is decommissioning 38 of its older drilling rigs (26 in Canada and 12 in the U.S.), 30 service rigs and nine other units. It now has 352 rigs (203 in Canada, 146 in the U.S. and three in Mexico). Most of these can handle hard-to-reach reserves, so they earn higher profits than its older models.

Precision’s units trade at a low 2.7 times its forecast 2009 cash flow of $3.50 a unit.

Precision Drilling is a buy.