Royalty Trusts
Royalty trusts are investment products that profit from royalties on the sale of production from natural resource companies such as oil and gas. They are a form of income trust. Income trusts are a type of investment trust that holds income-producing assets. Canada offers special tax treatment for income trusts. They flow their income through to their unitholders, without paying much if any corporate tax. Investors pay tax on most of the distributions as ordinary income (although some distributions qualify as a tax-free return of capital).
PENN WEST ENERGY TRUST $14.88 (Toronto symbol PWT.UN; Units outstanding: 414.2 million; Market cap: $6.2 billion; SI Rating: Speculative) is the largest oil and gas trust in North America.
In the first three months of 2009, lower oil and gas prices pushed down Penn West’s revenue by 47.7%, to $625 million from $1.2 billion. Cash flow per unit fell 50.6%, to …read more »
Royalty trusts involve far more risk than most investors realize. This is why we’ve recommended so few of them (and why we’ve managed to find some real gems among the ones we have recommended).
Ottawa has enacted new rules for royalty trusts that take effect in 2011. These have changed the outlook for many. However, the basic tests we use to …read more »
Royalty trusts with natural gas exposure are mostly down lately, as higher North American production and lower oil prices have prompted natural gas prices to move down from their highs of $13.50 per million British thermal units in July, to $8.18 U.S. today.
These three royalty trusts are cheap in relation to cash flow, based on the latest quarter. If natural …read more »
PENGROWTH ENERGY TRUST $20 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 247.9 million; Market cap: $5.0 billion; SI Rating: Average) is one of North America’s largest energy royalty trusts. Pengrowth produces oil and natural gas from properties in Alberta, British Columbia and Saskatchewan. It also owns 8.4% of the Sable Offshore Energy Project, which extracts natural gas …read more »
The main drawback to most income and royalty trusts is that many of them contain low quality assets. We aim to zero in on trusts with high quality assets that provide stable cash flows and distributions.
Even the best trusts, such as these three, are still highly cyclical. However, we feel they will continue to pay above-average yields, even after Ottawa …read more »
FORDING CANADIAN COAL TRUST $34 (Toronto symbol FDG.UN; Aggressive Growth Portfolio, Resources sector; SI Rating: Average) is different from other income trusts. For one thing, it came into existence through the breakup of Canadian Pacific Railway, rather than as a new issue created to sell to investors. In addition, the company has vast reserves of coal. Mining could continue at …read more »
Income trusts as a group are more speculative than most investors realize. They carry a lot of hidden risk, due to the way they are organized as investments, and to the way they are valued by investors.
Share prices of many companies rise in price when they announce plans to convert into income trusts. But that leaves a lot of room …read more »
PENGROWTH ENERGY TRUST $24.80 (Toronto symbol PGF.B; SI Rating: Average) produces oil and gas in western Canada. The company was one of the first Canadian royalty trusts, starting up in 1988. It’s now one of the largest energy trusts in North America. Pengrowth also holds an 8.4% interest in the Sable Offshore Energy Project. This project consists of six gas …read more »
Oil is currently trading at around $71 U.S. a barrel, not far from the record high of $75.35 it reached in April this year. Despite high inventory levels in the U.S., the world’s largest oil consumer, oil prices remain high. That’s largely due to fears of supply disruptions centered around Iran’s nuclear ambitions, violence in Nigeria, and political pressure on …read more »
In evaluating investments, many investors focus on what we’d call ‘investment outputs’, such as earnings, dividends, cash flow, return on equity, sales growth and so on. These are all important, of course, but you shouldn’t focus on them to the exclusion of what you might call ‘investment inputs’, such as the factors we use in assigning our Successful Investor quality …read more »
