Two oil and gas trusts with 2011 pluses

ARC ENERGY TRUST $19.84 (Toronto symbol AET.UN; Units outstanding: 235.9 million; Market cap: $4.7 billion; SI Rating: Speculative) produces oil and gas in western Canada. Its average daily production of 62,824 barrels of oil equivalent (this measurement includes natural gas) is weighted 49% to oil and 51% to natural gas.

In the three months ended September 30, 2009, ARC’s revenue fell 50.8%, to $239.2 million from $485.7 million. Cash flow per unit fell 54.3%, to $0.53 from $1.16. Lower oil and natural-gas prices were the main reasons for the declines.

ARC pays a monthly distribution of $0.10. The units yield 6.1%. The trust plans to convert to a conventional corporation on January 1, 2011. That’s when Ottawa will start taxing income trusts. However, ARC has over $2.2 billion in tax losses that it can use to delay paying taxes. As well, it paid out only 56% of its cash flow to its unitholders as distributions in the latest quarter. That low payout ratio will help it maintain its current distributions.

The trust’s debt remains low, at 13.6% of its market cap. The units trade at 6.7 times ARC’s forecast 2010 cash flow of $2.95 per unit.

ARC Energy Trust is still a buy.

PENN WEST ENERGY TRUST $18.66 (Toronto symbol PWT.UN; Units outstanding: 420.2 million; Market cap: $7.8 billion; SI Rating: Extra Risk) is the largest oil and gas trust in North America.

Penn West has average daily production of 178,124 barrels of oil equivalent (weighted 59% to oil and 41% to natural gas).

In the three months ended September 30, 2009, lower oil and gas prices pushed down Penn West’s revenue by 49.1%, to $732 million from $1.4 billion. Cash flow per unit fell 51.4%, to $0.84 from $1.73.

Penn West pays a $0.15 monthly distribution, for an annualized yield of 9.7%. The trust plans to convert to a conventional corporation before the end of 2011. Penn West has over $6.1 billion in tax losses that it can use to delay paying taxes until well past 2011. As well, its payout ratio will likely average about 50% next year.

The trust’s $3.8-billion long-term debt is 49% of its market cap, but just 2.8 times its annual cash flow. Penn West trades at 5.2 times its forecast 2010 cash flow of $3.60 per unit.

Penn West is still a buy.